Economic Theory & The Cuts - Part 2

It is not the Rate of Interest, which determines the demand and supply of Capital, but the demand and Supply of Money Capital, which determines the Rate of Interest. In fact, as Marx points out, in Capital, whereas the Exchange Value of commodities is determined by the labour-time required for their production, the Rate of Interest is solely determined by the interaction of Demand and Supply for Money. But, again as Marx points out, with reference to concrete examples, in the 19th Century, and as I have demonstrated above, the Demand and Supply of Money are not themselves exogenous factors, or independent variables. The reason that a large Supply of Money is available – set aside the increase in Money Tokens as a result of QE – is precisely because of an increase in economic activity. Companies that made huge profits, but were unable to productively invest all of it, accumulated it on their Balance Sheet. Large numbers of workers in Asia found their incomes rising, or became workers, having previously been peasants, and found that they could save money, to cover an uncertain future. Governments, in countries with high levels of manufactured or primary product exports, found that their revenues were increasing faster than their expenditure, and so were able to create Sovereign Wealth Funds. Moreover, as Marx, again points out, developed Capitalism soon created its own alternatives to Money and even Bank Credit. Provided trade is expanding, one firm will extend credit to another, in the form of not requiring payment until some time after delivery of its goods. It is only when trade begins to contract, when certainty of payment is reduced, that firms begin to demand prompt payment, and even cash payment. This rapid increase in the demand for actual Money, and the tendency of those with it to hoard it, is what really pushes up interest rates, and a perfect example of that is the Credit Crunch itself.

Consequently, it is not the Rate of Interest, the cost of Capital, that is determinant in the Supply of Capital, but the Absolute Volume and Rate of Profit. Viewed from that perspective, the Tories proposals appear even more dubious. Even, if the Cuts do not send the economy into Recession, not even they deny that they will have a negative effect on economic activity, and if economic activity declines, then absent a large reduction in the Value of Labour Power, the Absolute Volume and Rate of Profit will fall. Moreover, as Marx and Engels, and Lenin demonstrated, any attempt to counteract this latter tendency by simply reducing wages is bound to fail. Marx pointed out that workers form the majority of consumers. If wages are reduced then consumption will fall, and with it the Absolute Volume of Profit once more. Unless, the total amount of Capital employed is reduced the Rate of Profit will also fall. But, if the total amount of Capital is reduced – Capital Destruction – then again not only will the number of workers fall, but the demand for machines, materials and so on will also fall, bringing about yet a further decline in the absolute volume of profit. There is an alternative to that. If Capitalists reduce wages, they can make up for the lost consumption (Aggregate Demand) by utilising the freed up Capital to buy additional or better machinery. But, as Lenin points out, although, on one level, Capitalism is marked out from all other Modes of Production, by its drive towards Production for the sake of production, the reality is that even Capitalism ultimately has to gear its production to Consumption. There is every reason, during normal times, for competition to drive each Capitalist to expand production, because, in doing so, they hope to increase their profits. But, that is not true in non-normal times. No Capitalist, who only invests to make profit, is going to buy additional machines at a time when demand for their products is declining! They will only buy a better machine under such conditions, if old ones have worn out, or if it is so much better that it will hugely reduce their costs.

There is one other alternative. That is that Capitalists having freed Capital by reducing wages, use that Capital for unproductive consumption. They buy a new yacht, or whatever. But, in transforming this Capital into Revenue, they have essentially destroyed it. They create a demand for Capital in Department III producing Luxury Goods, and to that extent Capital is accumulated in that sector. But, as I have demonstrated elsewhere, Capital Consumes Itself, this is not a real Accumulation of Capital, but a transfer. It is an exchange of Capital with Capital to the extent that these goods are only bought by Capital, and consequently not productive of Surplus Value. The Capital destroyed in one sector simply reappears in the other. Nor is this a very practical solution for Capital in the short-term. The consequence of reducing wages is that workers demand for wage goods falls, and alongside that production of wage goods must fall. That in itself hits the profits of those Capitalist producing and distributing wage goods (not an inconsiderable part of a modern economy). It means that the Capital and workers in this section must then be reallocated to Department III to produce the luxury goods now demanded by all Capitalists. But, its not at all clear that the workers involved in wage goods production (generally mass produced), will be suitable to be employed in the production of Luxury Goods (usually very skilled, such as jewellers, and individually produced).

Moreover, even if consumption does not fall sufficiently to dissuade Capitalists from investing – maybe as the Tories hope to meet demand in export markets – as I have demonstrated elsewhere, and following Marx and Engels, Wages, Prices And Profit, the consequence of this higher rate of profit, and spur to accumulation, has to be an increased demand for Labour-power, which will in itself once again result in higher wages. Ultimately, what we are led to here is the same conclusion as Marx and Engels, which is that the ultimate determinant is the Value of Labour Power. If Capital wants to sustainably raise the rate of profit, by reducing nominal, if not real, wages, it has to reduce the Value of Labour Power. But, it has to be clear what is meant here by reducing the Value of Labour Power, as I have pointed out elsewhere. A Capitalist can buy a machine for £1,000 as opposed to £1,500 that looks to be identical. Yet, if the machine has been poorly constructed, and breaks down every day, it will no have been a better Value option. The cost of repairs, let alone the cost of the stoppage of production, leaving all other pieces of equipment idle, will cost him dearly. Similarly, a textile manufacturer who buys cheaper yarn that snaps every few yards, will soon learn to buy the slightly more expensive, but better quality material. And, it is in this sense that Engels, as someone with manufacturing experience himself, recognised that these methods of cutting corners, and doing this on the cheap, trying to save the odd copper were the methods of the small-scale Capitalist, not the Big Capitalist, and that applied to their attitude to the most important commodity they bought too, labour-power. It is no use Big Capital skimping on workers education, if the result is that instead of the increasingly skilled and educated workers they need, they get workers who lack the necessary skills, and who have to be trained at the employers expense just to bring them to a necessary standard. It is no use, particularly in a modern economy, having workers who suffer ill-health, and who like the faulty machine cause the boss to lose not only their production for the days they are off-sick, but the knock-on production to other workers production. It was for these reasons that Big Capital around the globe found ways to introduce various forms of Welfare State in order to ensure that such minimum standards were achieved, and so that each employer did not try to gain their own advantage by scrimping on their own provision.

No, in order to reduce the Value of Labour Power, it is necessary, not to reduce the quality or quantity of the components needed to reproduce modern workers, but to reduce the cost of those components. In an interview on Al-Jazeera, the other day, I heard Costas Lapavistas, argue that the Cuts were not necessary, and the fact that the actual Cuts, once announced, were much smaller than everyone had been led to believe, demonstrated that what had been taking place was an ideological exercise, which proved they were not necessary. The ideological exercise is to soften up the Public Sector ready for a transformation of working practices within it, and for increased privatisation. Over the last decade or so, there has been massive investment in the Public Sector, a tripling of spending on the NHS, for example, which was not in any matched by equivalent increases in output. Productivity gains have been abysmal in many, though not all, sections of the Public Sector. In part, it was frustration at that, which led Blair's Government to introduce targets, in order to exercise some control over the burgeoning bureaucracy. As Michel Aglietta argued, in the 1970's, changes in technology, even then, the massive increase in computing power, and so on, were bringing about changes in the work-process, affecting white-collar, administrative, and managerial functions, in a way that mass production had changed worked practices, for manual workers, in the 1920's. In fact, I can remember in the 1990's seeing an indication of that. During a period of about 18 months, whenever, we advertised various administrative posts, we had a flood of applications from former Bank Managers, because that technological change had caused a restructuring of Banking and Finance jobs. Aglietta called this process Neo-Fordism, and he argued that it could be seen in Europe, in hospitals and other areas of the Public Sector, and it would open up the potential for Capital to consider effective socialised provision of these commodities, by the private sector, which hitherto had been considered only possible of efficient and effective provision via the Capitalist State.

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