In the last couple of weeks, there has been turmoil in markets. Its not the kind of turmoil that most people notice. Its not the kind of turmoil seen a couple of years ago, when prices, on the major indices, fell day after day by large amounts. This turmoil is what is known as Volatility, that is prices moving up and down, by large amounts, both from day to day and within each trading day.
Back in the late 1970's the Hunt Brothers – who are barely disguised characters in the film “Trading Places”, starring Eddie Murphy and Dan Aykroyd– attempted to corner the market in Silver using their already huge large fortune.Silver Thursday. Within two months Silver was back down to $11 an ounce.
But, that was then, and this is now. The rise in the price of Silver in 1980 was partly, if not largely due to the Hunt Brothers attempts to corner the market.
In the meantime, it became apparent that even if a currency, such as the dollar, could act as currency, as a means of exchange, in times of rapid inflation, a paper currency cannot fulfil the other functions of money. Very high rates of inflation mean that its function as a unit of account are undermined, because the price of good A is different tomorrow than it is today. Although, payments in these paper dollars might nominally remain the same, the actual payment really amounts to a lower amount, because the purchasing power of those dollars has fallen.
After 1980, and especially after the introduction of Austrian economic policies in Britain and the US, to limit inflation, and as the new system of floating exchange rates settled in, restoring the dollar to its position as global reserve currency, the demand for Gold fell. During the period of the Long Wave downturn, through the 1980's and 90's, the price of Gold and Silver like other such commodities fell steadily. By 1999, Gold had fallen back to $250 an ounce.
The so called smart money investors, and certainly the “Gold Bugs”, the people who made billions from Gold's rise in the 1970's, have been buying Gold for most of the last decade. It is also why there has been a mushrooming of the firms offering to buy your Gold from you at knock down prices, just as in the past similar companies offered to buy your house from you at a knock down price, in order to rent it back to you. The smart money knows that when the majority of people realise that they would have been better hanging on to their Gold, and start buying it back, then Gold will go parabolic, soaring perhaps to as much as $7,500 an ounce, and certainly to somewhere between $3,000 - $5,000 an ounce. That is when the smart money will be selling, probably to many of those who are now selling their gold for next to nothing.
But, the rise in the price of Gold and Silver presents problems for the Global financial system, which is reliant on people continuing to accept the paper money printed in large amounts by Governments. If people begin to treat Gold and Silver as real money, then conversely it means they will have lost confidence in paper money, and it is only the retention of confidence in that money that enables it to function, to have any value whatsoever, over and above the value of the paper on which it is printed. The rise in the price of Gold and Silver has not been because of manipulation as happened with the Hunt Brothers, which is why, attempts to drive its price down last week, soon failed.
In the Keiser report, this week, Max Keiser spoke to Eric Sprott, about the attempts of authorities to stop the rise in the price of Gold and Silver.
What this demonstrates is another aspect of Marx's economic theory. Many people are familiar with the idea developed by Marx, that Competition leads to the concentration and centralisation of Capital, leading to the creation of larger and larger firms, of monopolies and oligopolies, and ultimately, as Engels described, its logical conclusion, the development of State Capitalism as the Capitalist State concentrates economic power in its hands through the nationalisation of the means of production, of banks and so on, with the Capitalists simply drawing their income from their State in the form of interest – becoming as Engels puts it “coupon clippers”.
In reply to Proudhon, Marx wrote,
“In practical life we find not only competition, monopoly and the antagonism between them, but also the synthesis of the two, which is not a formula, but a movement. Monopoly produces competition, competition produces monopoly. Monopolists are made from competition; competitors become monopolists. If the monopolists restrict their mutual competition by means of partial associations, competition increases among the workers; and the more the mass of the proletarians grows as against the monopolists of one nation, the more desperate competition becomes between the monopolists of different nations. The synthesis is of such a character that monopoly can only maintain itself by continually entering into the struggle of competition.”
The Poverty Of Philosophy.
It wasn't until the 1980's that Marxist economists got over the approach taken by Lenin in Imperialism, which was largely taken from the Liberal, Hobson. Lenin talked about all of those elements of Monopoly that are often cited, such as its excess profits, tendency to restrict innovation etc. In fact, by the 1980's Marxist economists had realised that this was largely false, though some continue to talk in these terms. In fact, as Marx says above, what developed was Monopolistic Competition.
But, as Marx sets out in this section of the Poverty of Philosophy it is not possible to simply take the good bits of Competition, and remove the bad bits. One consequence of competition is precisely the kind of swings of prices in markets that have been seen over the last week or so. The reason for that is simple. Although Marx, like the other Classical Economists explains why the Exchange Value of commodities is an objectively measurable quantum, determined by the average amount of socially necessary labour-time, required for production, under Capitalism, these Exchange Values become transformed through Competition, and the movement of Capital, in search of higher rates of profit, into market prices.
It is this chaotic movement that defines the Capitalist Market, and which leads to periodic crises.
Moreover, orthodox economics – apart from the Austrian School, which simply asserts that “people act” - is based on the idea that market participants act rationally. Yet, repeated incidents such as the Tulipomania, the Railway Mania, The South Sea Bubble, John Law's Mississippi Scheme, the Technology Bubble of the late 1990's, and the repeated Housing Bubbles, shows that individuals actions are frequently determined not by rational calculation, by by emotion. Today being Friday 13th., when, more people than you would think, simply stay in bed, all day, to avoid potential catastrophe, is a good example, of a wider phenomena of huge numbers of people, even now, in the Age of Science, who every day read their Horoscope thinking it in some way can tell you what is going to happen, who go through various rituals – Sportsmen, and gamblers including those on the Stock Markets are particularly prone to such behaviour – and act in many, many ways that have nothing to do with rational calculation.
Given that few people have any understanding about basic finance – as many TV programmes, showing that many people do not even understand things like APR, let alone know what interest rate they are paying on their credit cards, store cards etc., demonstrate – it is little wonder that this is the case. Of course, in a certain sense people's actions are not totally irrational.
But, for the reasons that Marx sets out, Competition has been a massively, revolutionising force. Moreover, competition exists for very real, material conditions. For so long as Mankind is subject to the Law of Value ,in its decisions over the allocation of resources for production, i.e. for so long as there is not abundance, under Communism, then Competition will continue. Marx sets that out most clearly in his Critique of the Gotha Programme. That Competition may not be Price competition via a market, but it will, nontheless be competition. And history tends to demonstrate that competition, outside the market, tends to bring with it all kinds of evils.
Nor is the idea that Competition could be administratively abolished, and replaced by democratic planning a solution. To a certain extent, we have a system of democratic planning of State Capitalism in Britain today.
In the section of the Poverty of Philosophy cited above, Marx says,
“M. Proudhon talks of nothing but modern monopoly engendered by competition. But we all know that competition was engendered by feudal monopoly. Thus competition was originally the opposite of monopoly and not monopoly the opposite of competition. So that modern monopoly is not a simple antithesis, it is on the contrary the true synthesis.
Thesis: Feudal monopoly, before competition.
Synthesis: Modern monopoly, which is the negation of feudal monopoly, in so far as it implies the system of competition, and the negation of competition in so far as it is monopoly.
Thus modern monopoly, bourgeois monopoly, is synthetic monopoly, the negation of the negation, the unity of opposites. It is monopoly in the pure, normal, rational state.”
But, in the same way, existing Capitalist, Monopolistic Competition can only be transcended not administratively abolished. Under Socialism, it will be the pushing of that Competition beyond its existing limits that will lead to a new synthesis. The basic elements of that can be seen today. Alongside Competition we see increasing Co-operation, for example, as stated above, between car companies in the development of new engines, to share the huge costs of research and development. In fact, in addition to Open Source software we now have the world's first Open Source Car.
Such competition would continue to drive innovation, whilst increasing levels of co-operation, between Co-operative firms, would extend the principles of concentration and centralisation of Capital, ensuring that each Co-operative firm, and industry, increasingly integrated its plans, shared its information with others within the sector. The more this asserted the superiority of Co-operative production, the more this integration and co-operation protected it from market vagaries, the more Competition itself becomes superseded, and co-operative, planned production takes its place, reducing relative scarcity in the process.
The most powerful aspect of Marx's economic analysis is to show the underlying objective logic of the laws that determine Exchange Value, and lie at the heart of how scarce resources are allocated, as well as to show how the application of those laws under Capitalism leads to periodic crises, including the periods of market mania, that have been called the Madness of Crowds.Deutsche Bank, on house prices is a good example of that, which is why I am confident that just as it shows that previous periods where prices were 20% higher than the mean were mirrored by periods where they were 20% below, then equally the fact that they re currently 40% above the mean will result in a period when they are 40% below i.e. a fall of around 80% from current levels.
But, although there is an objective, logical core to this, although, in the long term, every chart shows that these fundamental economic laws assert themselves, in the short term, it is the emotions and non-rational behaviour of individuals, what Keynes described as “Animal Spirits”, which are determinant.