Masters Of Money - Marx - Part 3

In Part 1 I demonstrated that it was no part of Marx's argument that Capitalism immiserates workers. That idea put forward by the Lassalleans - “The Iron Law of Wages” - was opposed by Marx. In fact, consistent with Marx's views set out as early as in The Communist Manifesto, and elaborated in more detail in Capital, about the historically progressive and revolutionary role of capitalism in transforming the means of production, Marx saw it as inevitable that workers real living standards would rise under capitalism. In order to continue expanding production, and selling commodities to workers, who were Marx said increasingly becoming the vast majority of consumers, capital would be forced to continually introduce new types of use value, new commodities that could be sold to workers, when their demand for previous types of commodities had been largely satisfied. Some of these commodities sold to workers would also be in the form of education and culture. In The Grundrisse, Marx describes this tendency as the “Civilising Mission of Capitalism”, and he links it to the changes in the nature of the working class, that would make it fit to become the new ruling class.

In Part 2, I argued that Marx's view of crises of overproduction is not at all premised on the notion of under consumption by workers based upon their low level of wages, or the need of capital to continually immiserate workers, driving them to some subsistence level in order to maximise profits. The crisis can be seen as deriving from two related factors. On the one hand, capital expands rapidly, its productive capacity rises sharply, producing masses of commodities, all of the same type, looking for a buyer. The same expansion of capital creates a rising demand for labour-power, which pushes wages higher. The latter has two effects. Firstly, it means that workers' demand for the main commodities they consume is largely satisfied, so getting them to buy more of these commodities, requires their prices to be lowered by larger and larger amounts, which squeezes profitability. At the same time, the demand for labour-power, pushing wages higher, makes it more difficult for capital to extract either absolute or relative surplus value, which squeezes profits from the other direction. Both these tendencies could be witnessed in the late 1960's as the post war Long Wave Boom began to falter.

In Capital, Marx and Engels describe this situation in terms of the capitalism of their day, which was still largely based on a large number of small to medium sized firms. Seeing, their profits being squeezed, each firm attempts to secure its own position, by accelerating those tendencies, which have created that very condition, but which, from the perspective of each individual firm, seem to be the means of increasing its own profitability and market share. That is they seek to expand their production even further, in order to obtain the benefits of economies of scale, which reduce unit costs. Each firm attempts to increase its output and thereby reduce its costs, but, because all or most firms attempt that same solution, the result is that the overproduction becomes even greater. It causes a sudden collapse in the rate of profit. Firms go bust, and even when they don't they lay off workers, they stop or severely reduce their purchases of machines, and materials, which in turn causes the markets for those companies to collapse. Where commercial credit has become established, this might delay the onset of such a crisis – and where the crisis is only partial or only limited, it may even prevent such a crisis breaking out altogether – but, the consequence is that the underlying over production is allowed to become even worse before it becomes manifest, and so when it does, it is even more pronounced. As demand for all these commodities not only ceases to rise fast enough, but actually collapses, it gives the appearance that its cause is insufficient demand, insufficient money in the economy.

To be clear, in saying that the workers demand for these commodities is relatively sated, its important to note that this is only a relative not an absolute condition. It is not that workers overall needs are met, on the contrary, they may be at a relatively low level of living standards. All that is relatively satisfied is the workers existing, limited range of consumption. There are always other commodities that workers could or may want to consume. But, once again, it is not the workers low level of wages, which prevents a resolution of this situation. For example, every worker might want to own a Rolls Royce, but if their wages were high enough to enable them to buy one, then that would mean that no capitalists employing masses of workers would be able to make profits. In the end, this comes down again to The Law of Value, that is given existing productive conditions, society does not have sufficient available social labour-time, to enable everyone to buy a Rolls Royce. But, this changes over time. At one time, it was only the rich who could afford to buy any kind of car, to have foreign holidays etc.

Consider Robinson Crusoe again on his island. He has to allocate a certain proportion of his available labour-time to producing as a priority those things which are vital to his survival, such as food and shelter. Having produced shelter, he may only need to allocate time for its maintenance or improvement, but each day he has to produce the food he requires. He may want to provide himself with a heated swimming pool, but the labour-time required for its production is simply too great given the hours he has available in the day. It is not that all his wants are satisfied, then, but the ones that make up his current range of consumption may well be. If, he finds a means of satisfying his need for food more easily, he may then have hours left over in the day. But, still unable to meet his need for a swimming pool, he may decide to use most of the saved hours to rest rather than increase his production of food much. In other words, the amount he is prepared to pay in terms of his increased expenditure of his labour-time for more food diminishes. This does not mean that he is in any way affluent or wealthy! In order that he might decide to allocate his newly available labour-time to producing something else, it has to be something that can practically be produced in that available time, and the utility from which is such as to persuade him that it is worth the expenditure of his time.

For an entire society, with gradations of wealth and income, however, it is clearly the case that the demands of the wealthier and more affluent people for commodities that require the expenditure of large amounts of labour-time can be met, even though they cannot be met for everyone. It is only when the productive forces have been developed further, so that the labour-time required for the production of these commodities has fallen significantly, and when the total labour-time available to society has expanded further, that these commodities can be sold to workers en mass. Although, a crisis of overproduction is then an absolute over production in capitalist terms, it is not absolute in the sense that the forces of production have been developed too far, or that society has become too wealthy. On the contrary, such a crisis occurs even though the needs of the masses of the population remain unmet, for a whole range of commodities, and when from an absolute standpoint, in order to meet those needs, the forces of production have not been developed enough!

As Marx points out the fact that there are some very wealthy, very affluent people in society is not an accident, but is itself a function of the way society goes about producing the goods it needs, and allocating the available labour-time. Capitalists have lots of money because they own the means of production, and are able to exploit labour. Workers do not for the opposite reason. Because, capitalists have lots of money, they can also have a disproportionate effect in a market economy based on monetary demand, on what activities labour-time is devoted to, because it will be devoted to those things for which there is sufficient monetary demand. But, we should not fool ourselves into thinking that it is solely the wealth and affluence of capitalists or the rich that cause all of what we see as inequitable, or irrational allocations of labour-time, or that this could be resolved by some kind of democratic planning.

That is because any kind of democratic planning depends on people voicing their preferences rather than expressing those preferences in the market, by how they spend their money. A simple example is the payment for different types of workers, which in turn determines the prices of different types of products. In numerous surveys, when asked who they think should be paid most money nurses tend to come near the top. If we were to democratically plan an economy, then the result would be to allocate a high proportion of available labour-time to be able to pay nurses high salaries i.e. enable them to buy or receive a high proportion of society's output. In these surveys, they frequently come above footballers. Yet, this is very far from the reality of today. But, as Marx says the value created by the labour of skilled, complex workers, such as footballers, is itself a function of how consumers – which today is mainly us as workers – value the product of that labour compared to the products of simple, unskilled labour. It is a function of how we decide in reality to spend our money. The reality is that whatever they say, taken as a whole, consumers value the product of footballers, and pop stars and other such highly paid labour, much, much higher than they do that of nurses.

In practice, then, its likely that if resources were actually allocated in line with people's voiced preferences rather than their actual preferences there would be a misallocation of resources. That is why, wherever resources have been allocated by such methods, for example under rationing, or according to some other form of plan, consumers actual demands fail to be met, and so black markets arise. Another example is the way allocation of tickets for events always leads to a thriving black market for tickets, which sell at prices way above their face value.

In the BBC programme, Madsen Pirie, of the Adam Smith Institute, argued that the current Debt Crisis had nothing to do with the low wages of workers, or any crisis caused by the inability of workers to consume. Fundamentally, he is right. Fundamentally, when he says that the cause of that crisis was that governments printed way too many money tokens, which enabled banks and finance houses to lend recklessly, which blew up bubbles in property, and financial markets, which are in the process of bursting, and which has left a huge overhang of debt, because the assets are no longer worth as much as the debt used to purchase them, he is again right. But, he misses one important point, which is why governments, going back at least to Thatcher and Reagan, decided to print all those money tokens, and to encourage the banks to lend recklessly and so on!

In fact, all that this amounts to is swapping one form of crisis – an economic crisis in the 1980's/90's – for another – the debt crisis of the noughties through to today. In the 1980's and 90's, as the global economy suffered a long wave downturn, following the long wave, post war boom, that crisis in the West could have taken the same form as that of the 1920's/30's. Its possible to argue that western governments, having learned the lessons of the 1920's and 30's, and still facing, in the early 1980's at least, powerful labour movements, as well as the USSR, developed a strategy to avoid it. I think that is too conspiratorial.

By the mid 1980's, the economic downturn, and the fact that none of the labour movements were provided with any practical ideas about how to deal with it, had meant that the working class were largely defeated. By the late 1980's, when the turn to Monetarism was made, and the monetary spigots were opened wide, to stimulate economies, not only were workers defeated, but the USSR and its satellites were also in rapid economic decline. Capital and its representatives did not need to rescue capitalism to prevent revolution, nor did they need to turn to fascism, as they did in the 1930's. Rather they sought to create the conditions for increasing the rate of profit, and that is what the loose money policies did.

But, there was another aspect to this. In the 1920's and 30's, workers had very little in the way of savings or assets. Few people owned homes, had pensions, or savings, let alone money in mutual funds, shares and other forms of investments. Consequently, there was little or nothing for them to borrow against. Although people did borrow money from the tally man and so on, it was small scale compared with recent decades, and being in rented accommodation, people who got into too much debt resorted to the moonlight flit. There was no way then that workers consumption could be sustained by borrowing. But, by the 1980's that was not the case. During the post war boom workers had bought houses, some who bought in the early 1960's did so at prices that were quickly inflated away as wages rose in the 1960's and 70's. But, even those who bought in the 1970's benefited in this way to a great extent. In addition, large numbers of people, particularly in the state capitalist sector, acquired pensions, and were able to save money in a range of products.

So, in the late 1980's and through to the credit crunch, people were encouraged to see these reserves they had built up as means of maintaining their consumption, whilst their actual real wages remained flat or even falling. They were encouraged to take out second mortgages, to re-mortgage if their house was paid for, in order to be able to buy all those things they had always wanted, to engage in the Equity Release scam, whereby they effectively give their house away to financial shysters in return for an annual income to top up their pension. Where they were moving house, they were encouraged to take out the maximum mortgage and even 125% mortgages, in order to provide themselves with what was almost presented as “free” money, to spend as they liked. And, this was extended not just to people who had equity in their existing houses, who had savings, and so on, but was applied to people who already had debts but no savings, who were buying their first homes, and who frequently had insufficient income even to make the repayments.

When unemployment rose again, as well as interest rates in 1990, house prices collapsed by 40%, and tens of thousands of people lost their homes. But, then the money printing continued once again under Nigel Lawson and other Tory Chancellors, as well as under Alan Greenspan in the United States, and the bubbles were blown up once again, but this time even bigger than before.

But, the effect of all this borrowing, which indeed created the current Debt Crisis, and which will cause, another huge crash of property and stock markets, did have the effect of preventing the long wave downturn of the 1980's/90's from turning into the kind of depression of the 1920's/30's. It did so whilst having other consequences. The credit taken out on the back of these assets enabled consumption spending to largely be maintained even though wages were falling, but the spending did not go to sustain production in the US, UK etc. On the contrary, the process of de-industrialisation continued apace. But, capital was able to take advantage of this.

Merchant Capital makes profits as a consequence of buying commodities below their price of production from the producer, and then selling them at the price of production. The producer is prepared to do this, because it saves them the costs involved in selling their commodities. The fact that merchants specialise in this, means they can do it cheaper, so the producer's net profit is greater than if they took on the costs of selling themselves. So, when masses of production moved to China, and Chinese producers were able to make huge profits, from exploiting cheap Chinese labour-power, merchant capitalists, in the UK and US, were able to get their share of these huge profits by selling Chinese products in their home markets.

British and US workers were thrown out of many manufacturing industries, as the products they previously produced were now made in China. The US and UK workers (or frequently, in the case of the largely male, manual workers, from coal mining and steel production etc., their wives or children) exchanged their higher paid jobs, for low paid jobs in retail palaces established around the country – often on former collieries and steel works – to sell the mass of, now much cheaper, manufactured goods coming in from China. The difference in wages was made up through borrowing – either against their accumulated assets, or else against the paper, and grossly fictitious, value of houses they had only recently taken out mortgages on.

On this basis, the influence of productive capital was gradually weakened, whilst that of merchant and money capital rose. What was really going on was that workers, who had built up real property, in the post war period, were being robbed of it, by being persuaded to borrow money against it. It was a similar kind of robbery as that which robbed the peasants of their property via the Enclosure Acts, or the French peasants in the 19^th century, via taxes and high interest rates. Nick Clegg's proposal to get parents and grand parents to put up their own houses as security, in order that young people can continue to buy grossly inflated property, and so keep the banks afloat, is a continuation of that scam.

At the same time as merchant capital was able to prosper, under this arrangement, so too was money capital. It did so in two different ways. On the one hand, money dealing capital derives profits in a similar way that merchant capital does. It saves industrial capital the costs in holding capital in its unproductive money form. On that basis, it is able to charge industrial capital for doing so. Secondly, money capital operates as interest-bearing capital, lending money to industrial capitalists at interest.  Even where interest-bearing capital lends to consumers, rather than producers, it is a deduction from the surplus value of productive capital, because the money the consumer pays to the money lender is money that otherwise could have gone to the producer, as part of the price of the commodity they have bought. Because London and New York are the global centres of finance, money capitalists, in these countries, were also able to make profits and obtain interest by lending to producers in China and elsewhere, and by acting as the main centres of money dealing and movement of payments.

The third way in which the money capitalists and Financial Services Industry was able to make profits was as productive capitalists themselves. Marx describes productive labour as that which exchanges with capital, and produces surplus value. Suppose I employ a gardener to do my gardening. He does not exchange his labour with capital, but with revenue i.e. money from my income, and so he is not a productive labourer. However, if I engage a gardening firm to do my gardening, and the firm employ the same gardener he then does become a productive labourer, because he exchanges his labour with capital and, because his wages will be less than the value he creates, and the price I am charged by the firm, for the gardening service, he will produce surplus value.

One of the consequences of the Financial Big Bang of the 1980's, was that there was an explosion of financial products that were created, and sold both to individuals and to companies as commodities. A service to tend and cultivate your finances, is just as much a commodity as is a service to tend and cultivate your garden. Consequently, these activities constitute productive activities from the standpoint of capital, and those workers employed in producing these commodities, even, or especially those that are very highly paid, are just as much productive labourers as is the gardener. In fact, just as the highly complex labour of a David Beckham is capable of producing huge profits for the capitalists that employ him, so the highly complex labour of a financial analyst etc., in producing high value financial commodities is able to produce large amounts of surplus value for the capitalists that employ him/her. After, the Big Bang the massive growth of these financial commodities created scope for huge profits in selling them across the globe for the capitalists in London and New York where these industries were based.

The fact that there was massive speculation in some of these commodities after they had been created does not change the fact that they are commodities, any more than the fact that there is speculation in corn, oil etc., on commodities markets, changes the fact that these are commodities, or that speculation in houses means that a house is not a commodity, or the builder who built it in the first place was not a productive capitalist!

So, there were very good reasons why capitalist governments in the UK and US would print money to reflate their economies, and thereby facilitate an increase in the rate of profit. There were very good reasons why, as the process of de-industrialisation proceeded, merchant capital was able to grow like Topsy, as new cathedrals to consumerism sprang up around the country, selling cheap Chinese manufactures, sold to workers who maintained, or even extended their consumption, on the back of vast amounts of cheap credit. And, there were good reasons why money capital was also able to grow rapidly on the back of these same conditions. It is also why these sections of capital have dominated over productive capital for the last 25 years or so, reflected in the ideology of Neo-Liberalism, and why they still hold sway in political circles, despite those conditions having ended.

But, Pirie is correct that the current Debt Crisis is precisely that, and not a crisis of overproduction as described by Marx. If we look at the capitalist system as it must be viewed as a global economy, none of the aspects of overproduction described by Marx and Engels are visible. In the last ten years, capital has certainly expanded rapidly. Global GDP has doubled, global fixed capital formation (fixed capital accumulation) has also doubled. At the same time, this huge accumulation of capital has seen the size of the global workforce rise by around a third, equivalent to 500 million workers drawn into the sphere of capital, and to quote Marx in The Communist Manifesto, “rescued from the idiocy of rural life.” Yet, there is no sign that this growth and accumulation of capital has reached anything like a condition of over accumulation. Nor should we expect it to do so, because typically a long wave boom lasts for around 25 years, and we are only 12 years into this boom.

Outside, Europe and North America, growth, although having recently slowed as part of a cyclical slowdown, continues at a rapid pace, considerably above the average of the previous 25 years. Moreover, company profits continue to grow, whilst increasing demand for commodities as that growing, global working-class rapidly raises its living standards in Asia, Latin America and Africa, means that far from falling and squeezing profits, prices are rising. At the same time, profits are being enhanced as the introduction of vast new swathes of new technology raises productivity levels, thereby facilitating an increase in relative surplus value. Finally, that same technology is bringing forward, on an almost daily basis, whole new ranges of commodities, that are encompassed into workers consumption patterns, and as rapidly creating not just new firms, but whole new industries.

The Debt Crisis, is essentially a North Atlantic crisis, though if it is not resolved, and certainly if it is exacerbated by wrong headed decisions by politicians, still following a Neo-Liberal mantra, the crisis that could result from it, would inevitably affect other parts of the world. In Volume I of Capital, Marx describes the difference between these two types of crisis, one a real economic crisis caused by an overproduction of capital, the other a purely financial crisis, whose origins arise in the financial world, and whose real effects are played out there, and affect the real economy only indirectly.

“Herrenschwand’s fanciful notions amount merely to this, that the antagonism, which has its origin in the nature of commodities, and is reproduced in their circulation, can be removed by increasing the circulating medium. But if, on the one hand, it is a popular delusion to ascribe stagnation in production and circulation to insufficiency of the circulating medium, it by no means follows, on the other hand, that an actual paucity of the medium in consequence, e.g., of bungling legislative interference with the regulation of currency, may not give rise to such stagnation.” (Note 1 p 122)

“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.” (note 1 p 137)

The debt crisis afflicting Europe, the US and the US is definitely of this latter variety. It is not a crisis of overproduction. Its roots lie in the build up of debt during the period of long wave downturn of the 1980's and 90's – and, contrary to all the media reports, this is largely private debt not public debt – and the attempts to prevent the bubbles created by that debt in property, stock and bond markets from bursting, in order to protect money capital, by the continuation of similar methods to those which created those bubbles in the first place i.e. unsustainably low interest rates, huge money printing, attempts to maintain unsustainably high property and other prices by government, and other state intervention.

In the US and Ireland, the property bubbles have burst with house prices falling by around 60-70%. And now, those property markets are stabilising, and even showing signs of recovery. In the UK, Spain, and other parts of Europe, where property prices have bubbled up, that crash is yet to happen, but inevitably will. On CNBC the other day, one analyst said property prices in Spain probably have to fall another 50% from current levels – which will mean that the latest stress tests on Spanish Banks will way underestimate how much of a bail out they require. In the UK, the IMF and OECD say that house prices are 40% above historic levels, and on any metric they are grossly over priced. In the past, any correction has been double what the over pricing was. In 1990, for example, they were overpriced by 20%, but fell by 40%. On that basis UK house prices need to fall by 80%, before they will stabilise at sustainable levels.

In the US, UK, Germany and Japan, the search for safe havens, as well as the actions of central banks in printing money, have sent bond prices to record highs, causing yields on those bonds to fall to levels that have not been seen in three hundred years. That is as much of a bubble as the bubble in house prices. Sooner or later, that bubble will burst too, causing all interest rates to jump sharply, which if it hasn't already happened by then, will certainly cause the property market to collapse. I am in the process of analysing the performance of global stock markets in comparison to GDP growth, on a cursory view, it appears that despite all of the money printing stock markets may not have risen disproportionately in the last ten years. That is not surprising given the crash of 2000. It appears that the greatest excess of stock markets, however, against GDP was during the 1980's and 90's, which means that those markets too may be over valued on a longer term historical basis.

But, all of these things are aspects of that latter kind of crisis described by Marx, a financial crisis rather than an economic crisis.

 

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