The Rates Of Profit, Interest and Inflation - Part 12

Inflation (4)

For some time, Marc Faber, who publishes The Gloom, Boom and Doom Report has been arguing that the Federal Reserve, and other central banks have become so committed to printing money, to keep asset prices inflated, that they cannot now withdraw from the policy. Every previous attempt to do so has resulted in markets crashing, and the reintroduction of the policy. They are hoping against hope that things will change that will allow them to withdraw at some point, but in reality they will just have to keep printing money to infinity, or more accurately until the entire system collapses. Its a similar view to that put out by Moneyweek in their End Of Britain video - The End Of Britain . Its possible, but unlikely.

There is a difference between money and other commodities. Marx in Volume II describes how money becomes available within the economy. Its not a question many economists consider, even Marxist economists, because its taken for granted that money is just there available to perform its function. But, of course it doesn't just appear from nowhere. Gold had to be mined, and converted from being just gold into being coins etc. But, the interesting thing about money, including gold, is that once it has been put into circulation, it basically stays there. Money as a commodity – the universal equivalent form of value – is different from every other commodity in that respect. Every other commodity, goes into circulation to be sold by its owner and consumed by its buyer. Even commodities that form fixed capital are consumed eventually, even if it takes a long time. But, money goes into circulation, not to be consumed, but just to circulate!

A has a commodity worth £10, which they sell to B, who consumes it. With the £10, A buys a commodity worth £10 from C, which they then consume. The £20 of commodities that went into circulation have now completely disappeared, consumed. But, the £10, which was used to buy them is still performing its function, still circulating, and will continue to do so, for many years possibly, until it is worn out. As seen previously, with gold and other precious metals, if too much of them is in circulation for the needs of circulating commodities, the value of the coins falls relative to their commodity value, and so they are withdrawn. But, that does not happen with money tokens or credit, in the form of bank deposits. Once created it remains in existence, available to circulate, so when more is created, it simply adds to the existing mass of money already in existence. The only way it can be reduced is essentially by the central bank taking the money out of the economy.

In general, this is not a problem. Capitalism continually, if unevenly, reduces the value of commodities, and generally speaking, because capital expands, more commodities are put into circulation. In order to prevent the fall in the value of commodities causing deflation, the value of money needs to fall, so a gradual increase in its supply achieves that. And, with more commodities to circulate, again more money is required. But, over the last 30 years, the amount of additional money put into circulation, mostly via credit creation, has been vast. It was needed to match the huge reduction in the value of commodities, and equally huge increase in the number put into circulation, but all of that money remains in circulation, and in the last few years an even larger amount has been added to it, to prevent the collapse of the asset bubbles blown up on the back of low interest rates and speculation.

The problem is, as stated in the last part, the conditions that caused the massive drop in the value of commodities is ending. Although, the prices of raw materials are likely to fall from here, as new supplies begin to match global demand, the productivity gains in the way those materials are used, is also coming to an end, so the effect on manufactured goods prices will generally be in an upwards direction. In fact, with some raw materials like oil, although new technologies like “fracking” are making additional supplies available, which will last for maybe 50-100 years, the costs of investment in this new production will mean that the price of oil is unlikely to fall much from here, even though oil will continue to be available to meet energy needs. China, and other previously low cost producers of manufactured goods are facing inflation, and that means the buyers of those goods will face higher prices too, which will pass through into higher prices of capital goods, and of workers consumption goods putting upward pressure on wages, and downward pressure on profits.

Where in the past, the mechanism was rapidly falling commodity values, leaving money available in large masses to flow into speculation, now the process will be the exact opposite. The huge pools of liquidity will begin to be soaked up in the circulation of increasingly higher priced commodities, including labour-power, i.e. inflation. Where there has been a real terms deflation of consumer goods prices for 30 years, and inflation of asset prices, we will now see an inflation of consumer goods prices, and deflation of asset prices, but in the nature of things, where consumer goods prices only deflate gradually, asset price bubbles deflate in the same way that a balloon does when its pricked with a pin!

On current evidence, there is a lot to support Faber's argument. The attempts to withdraw liquidity from the system goes back to the 1980's. But, when markets crashed in 1987, Alan Greenspan, a former devotee of Ayn Rand, and sound money, stepped in to goose the markets with lots of liquidity. On several occasions in the 1990's he repeated the same manoeuvre, and that policy has been followed by Ben Bernanke too. If we look at the policy of the UK Government, despite all their talk about debt, it has been exactly the same, print money, encourage more debt, particularly to try to prevent a collapse of the property market. And, of course, Governments have another good reason for adopting such a policy.

I pointed out several years ago, Paying For The Crisis – governments always look to inflation as a means of paying off their debts. In the last 5 years, inflation has reduced the real value of UK debt by around 30%. In other words, inflation has reduced UK debt, by far more than any of the Government's misplaced austerity measures!

But, the problem is that whilst Government's may welcome real inflation of around 6% in current conditions, they tend to fear it, as the Germans do, because it can get easily out of hand, precisely because of all that money sloshing around inside the system. Trillions of dollars is tied up in fictitious capital, in bubbles in property shares, and bonds, and even then, there is in the US alone about a trillion dollars sitting in cash waiting to find a home. As the prices of commodities rise, that cash will begin to move in that direction. The existing trend to higher interest rates caused by the shift in the supply and demand for money-capital, will then be compounded by the fear of inflation, causing the bond vigilantes to ditch their bonds over night. Bond prices will collapse, interest rates will rise, property prices will collapse, as will stock markets, the latter in part because of a collapse of the banks whose insolvency will become apparent, as this fictitious capital is destroyed.

So, Faber and Moneyweek's view is unlikely, because at this point more money printing would be pointless. All money printing can do from here is increase inflation, and thereby provide the spark for the above. At this point the only thing the State could do would be to fully nationalise what was left of the banks, so that the real economy could continue to function. Consequently, although we will see a huge deflation of asset prices, we are unlikely to see a hyper inflation of consumer goods prices. As I suggested a few years ago - A Momentous Change – this financial crisis, which should probably be seen as a continuation of 2008, will necessarily have serious knock-on effects to the real economy mostly in the US and Europe where the financial crisis will be centred, which could last 3 or 4 years, but the longer-term consequence would likely be positive for capital, because similar to the conditions Engels describes following the collapse of the Railway Mania, it would mean money-capital flowed into real productive capital, creating a better framework for a continuation of economic growth, and a rebalancing of the global economy.

The extent to which the banks and property remain pivotal to this has again been shown in the last few days. In the US, Detroit has declared bankruptcy, weighed down by its own accumulated debts. But, a side effect is that UK and European banks are set to lose $1 billion of the loans they had made to the city. Detroit is likely not to be the last US city to declare bankruptcy. Chicago looks to be in a similar situation. But, it is also being revealed that Greece remains mired in economic chaos, its debt continues to rise, and it looks likely that more of its debt will have to be written off. It was the writing off of large amounts of Greek debt that led to the collapse of the banks in Cyprus. With European banks all bankrupt, and only managing to hide it via large scale use of derivatives, further losses on their Greek debt is likely to see several more European banks go to the wall.

Given the use of all these derivatives, how that may play out with a series of unforeseen consequences is anybody's guess. But, Germany appears to believe that the various policies adopted by the ECB to buy up peripheral government bonds, has simply allowed the governments in those countries to continue without making the necessary adjustments to their economies to make them more competitive. As the German elections approach a tougher stance from Germany seems likely. Consequently, its unlikely that the ECB is going to engage in the kind of massive money printing that would be required to lead to hyper inflation.

To summarise, the global economy remains in the most powerful long wave boom of its history. It is a boom that has already led to the development of huge new economies in China and elsewhere, and a spread of the rule of exchange value across a wider area of the globe than ever before, with new capitalist economies, and with them working classes being established across Asia and Africa, and existing economies in Latin America taking on a new life. The Spring Phase of that boom has ended, and the Summer Phase has begun where continued strong growth continues, but where the productivity gains of the previous period slow down, and with it the rate of profit. The imbalances that arose in the global economy over the last 30 years, which are once again an example of the operation of the law of combined and uneven development, led to the build up of huge amounts of debt on one side, and huge cash hoards on the other. It led to the development of speculation, and the creation of astronomical levels of fictitious capital.

The Summer Phase will bring about a financial crisis that will resolved that contradiction. Inflation and interest rates will rise, asset prices will be massively deflated, creating a “reversion to the mean”, that will put the system on a more sustainable footing. The boom will continue until around 2025. Socialists should utilise the intervening period, to build up their economic and social weight, develop their organisations, and begin to create their own workers owned and controlled sector of the economy, ready for when the next conjuncture arrives.

Back To Part 11

Capital II, Chapter 4 - Part 9

The Meeting of Demand and Supply

The capitalist buys low and sells high. He extracts more money from the market than he threw into it. But, that is only because he throws more commodity-value into it than he draws out. That is because the value of the commodities he throws back into the market has been increased by the addition of surplus value, extracted from the workers. If capital only put as much commodity-value back into the market as it took out, then it would mean no surplus-value had been produced.

The capitalists supply of commodity-value is always greater than his demand, and the greater the difference between the two, the more rapid is the pace of expansion of his capital.

“His aim is not to equalize his supply and demand, but to make the inequality between them, the excess of his supply over his demand, as great as possible.” (p 121)

The value of the means of production he buys is always less than his advanced capital – because he also buys labour-power – and, therefore, an even smaller proportion of the commodity-value he throws into the market. His demand for labour-power is determined by its proportion to total capital i.e. v/C. As previously described, this proportion continually shrinks, because increasing productivity means less and less labour is required to process a given amount of material.

Capital's demand for labour is essentially also a demand for those commodities necessary for the reproduction of the worker i.e. the variable capital. So the capitalist's total demand equals c + v. But, the capitalist's supply is c + v + s.

“Consequently if the composition of his commodity-capital is 80c + 20v + 20s, his demand is equal to 80c + 20v, hence, considered from the angle of the value it contains, one-fifth smaller than his supply. The greater the percentage of the mass of surplus-value produced by him (his rate of profit) the smaller becomes his demand in relation to his supply.” (p 121)

As productivity rises, the demand for labour (and, therefore, means of subsistence) declines relative to the demand for means of production. But, his demand for means of production is also always smaller than his capital. So, his demand for means of production must always be smaller, in value, than the product of a capital of equal size to his own, that supplies him.

Suppose we have a capitalist with £1,000 of capital divided:

C £800 + V £200 + S £200 = E £1200.

His demand for means of production is £800. Assuming the supplier/s of these means of production have the same size of Capital, and a similar division of their capital, the total value of their output is also £1,200. His demand, for means of production, therefore, equals 800/1200 = 2/3 of the value of their output.

His own total demand, c+v, Marx says, amounts to 4/5 of his own output, but that figure is wrong. The Surplus Value is 1/5 of the Capital laid out, but 1/6 of his total output. His total demand is £800 (c) + £200 (v) = £1,000. His total output is £800 (c) + £200 (v) + £200 (s) = £1200. So, his demand = 1000/1200 = 5/6 of his total output.

Back To Part 8

Forward To Part 10

The Effect Of Social Capital On The Rate Of Profit

As part of the discussion on the falling rate of profit I thought I would put this forward, to show just the effect that a shift in the proportions of the total social capital have on the average rate of profit.  The figure for the percentage of social capital is taken from actual economic statistics for all years other than 1851.  The figure for agriculture for that year is based on the percentage of the population employed in Agriculture, and the other two figures are estimates.

Likewise the figures for the percentage of total capital made up of constant capital and variable capital in each sector are guesstimates.  The 80% figure for constant capital for industry in 1851, is based on examples provided by Marx and Engels in Capital.

As will be seen, in line with the concept that the proportion of constant relative to variable capital grows, for industry I have indicated a rise from 80% to 90%, which is consistent with Marx's statement that the value of constant capital does not grow proportionate to its physical proportions in production.  I have made much larger increases in the constant capital of the agricultural and service sectors, even though its possible that rises in productivity may have also restricted the rise in that value too.

However, as can be seen the estimated rate of profit for 1851 of 28%, which again is close to some estimates provided by Engels, actually rises, despite the overall increase in all sectors in the organic composition of capital!  The reason for that is the progressive diminution of the role of industry as a component of the total social capital.

Not too much should be taken from these actual figures which are only estimates for illustrative purposes.  But, that applies in other ways too.  For example, the average rate of profit on this basis falls from 36% in 1961, to 35% in 1976, and 34.6% today.  But, no account is made here of the potential rise in the rate of surplus value, for the undoubted increase in the rate of turnover, which since 1961, would be likely to double, at least the nominal rate of profit.

The significance of these figures, given that they are based on the actual shift in the proportions of total social capital is to emphasise the point I have made previously, which is that the factors that lead to the potential of a falling rate of profit in one sector, do not logically have to apply to the economy as a whole.  New types of industry are arising periodically, for whom existing organic compositions of capital are irrelevant.  To the extent that these new industries have lower organic compositions - and all new industries do - then as these new industries become a more significant element of the total social capital, then even as their own organic composition rises, they can act to lower the overall level, and thereby act as a factor causing a rise rather than a fall in the average rate of profit.

Effect Of Changes Of Social Capital On The Average Rate of Profit
	Sector
		Percentage of Social Capital	Constant Capital	Variable Capital	Surplus Value	Rate Of Profit	Average Rate Of Profit
1850	Agriculture	7	30	70	70	70	490
	Industry	83	80	20	20	20	1660
	Services	10	40	60	60	60	600
							28
1961	Agriculture	5	40	60	60	60	300
	Industry	48	85	15	15	15	720
	Services	47	45	55	55	55	2585
							36.05
1976	Agriculture	3	50	50	50	50	150
	Industry	40	88	12	12	12	480
	Services	57	50	50	50	50	2850
							34.8
2013	Agriculture	1	60	40	40	40	40
	Industry	18	90	10	10	10	180
	Services	81	60	40	40	40	3240
							34.6

The Rates Of Profit, Interest and Inflation - Part 11

Inflation (3)

To summarise what has been said previously, over the last thirty years, first the rate, and then also the volume, of profit, globally, has increased by a large amount. It has financed a large accumulation of capital, but was still so great that large amounts of surplus-value accumulated as money hoards, and thereby pushed down global interest rates, as well as finding its way into a range of speculative activities, blowing up bubbles in property, shares and bonds. Part of the reason for the rise in the rate of profit was a revolutionising of production via new technologies that slashed the value of commodities, including commodities that form constant capital. In order to avoid a global deflation, capitalist states printed large amounts of money tokens and increased credit to reduce the value of money. That multiplied the effect of the money hoards going into speculative activity. There was no inflation of consumer goods prices because their values had been slashed, but the money printing created a huge inflation of asset prices.

That in itself has had other effects that I will examine later. For example, the main reason that pensions are inadequate is that share and bond prices rose astronomically, so that workers pension contributions bought fewer shares, bonds etc. to go into their fund, whilst the yield on those shares and bonds fell for the same reason. Workers ended up, thereby, with fewer bonds and shares in their pension fund than they would have had, and a much reduced income on those shares and bonds on top of it.

But, the conditions that kept interest rates low – high and rising profits – and that kept consumer price inflation low – large increases in productivity that slashed commodity values – have started to reverse. The large gains in productivity enjoyed over the last 20 years have reached their peak and started to decline. So, the values of commodities may continue to decline for some time, but at an increasingly slower pace. That in itself means that the reductions in the value of constant capital that helped drive up the rate of profit will also decline. The value of commodities that form workers means of consumption will also not fall so quickly, so the value of labour-power will not fall so quickly. Again that means that advances in relative surplus value will slow down, putting pressure on the rate and volume of profit. But, the same causes will also mean that more constant capital has to be expended to obtain the same amount of productivity gain, to bring about a similar level of product innovation and so on, all of which are the basis upon which modern monopoly capitalism competes in the market. An increasing demand for capital, together even with a slowing of the rate at which new potential capital is formed i.e. rate of profit, means that the demand and supply for capital shifts so that interest rates rise. We have already seen such a shift in global interest rates, which although small in absolute terms, have been very large – between 50-100% - in relative terms.

The question is what, if anything can central banks do about that? The view of orthodox economics, and indeed of many Marxist economists has been that low interest rates have been the consequence of money printing by central banks. I have shown that this thesis is false. Interest rates, as Marx argues, are determined by the supply of and demand for money-capital, not money. Central banks can print money-tokens, but they cannot create capital. For that reason, central banks cannot reduce interest rates, or to be more precise, they can only reduce some interest rates at the cost of increasing others.

Money-capital when it is demanded and supplied necessarily assumes the form of money. Indeed, as Marx points out in Volume II of Capital, when this money-capital buys means of production and labour-power (productive-capital) it does so not as capital, but as money. It is money not capital that is handed over in the purchase. On that basis, the origin of that money – whether it is the money form of expanded capital, surplus value/profit, or whether it is simply new money printed by the central bank – disappears. But, the origin of that money, its content as opposed to its form, is very important. If it is the former, it is the monetary equivalent of value that has already been thrown into circulation. It is merely then the equivalent form of that value, the means by which its circulation, its purchase and sale is facilitated. But, if it is the latter, then it has no value equivalent already in the market. Consequently, it is the situation described above where more money has been thrown into circulation than is required for the value of commodities to be circulated. The result is then inflation.

Once again, the orthodox view is that inflation has been kept low because of low demand, weak economic activity etc. That view is also false. There was weak economic activity in the 1970's and early 80's, and yet inflation in Britain at that time ran at nearly 30% p.a.! There was weak economic activity in Germany in the 1920's, and yet the Weimar Republic suffered from hyper inflation. The reason consumer prices have not soared, due to all the money printing, is not a result of weak economic activity – they did not rise sharply during the boom in consumer demand at the beginning of the century either – but has been due to the fact that commodity values have been slashed as a result of the gains in productivity. The end of that condition means that large amounts of money in circulation will result in consumer goods prices rising.

Bond Vigilantes can force down the price
of bonds if they fear inflation, pushing up
interest rates.

This poses a dilemma for central banks. On the one hand, a central bank like the Bank of England, can control some interest rates. For example, if the British Government wants to borrow £10 billion for 10 years, it issues 10 Year Gilts. Normally, these would be auctioned, and potential buyers, usually banks, insurance companies, pension funds, would then offer to buy them. The Gilt would offer a nominal rate of interest say 2% p.a. against the face value of the Bond. But, depending on market conditions, the buyers of these bonds would offer more or less than the face value of the bond to buy it. If they think that risks are high, including the risk of inflation, they will offer less than the face value of the bond, and vice versa. So, the yield they receive on this bond, as opposed to the nominal interest it pays – the coupon – will be higher if they pay less than the face value, and lower if they pay more than the face value of the bond.

But, what has happened with Q.E. in Britain and in the US, and the ECB has done something similar, is that the central bank itself buys these bonds. It can simply “print” money to buy them, and in doing so, it pushes up the demand for the bonds, increasing their price, and thereby reducing the yield on them. Market interest rates are in reality determined by these yields on bonds, not by official interest rates, because they determine how much borrowers must be prepared to pay to borrow money by issuing their own bonds. For the same reason, they also influence company dividend policies, and share prices, because the yield on a share is similarly determined by the relation of the dividend as a percentage of the share price. If share prices fall yields rise and vice versa.

But, the problem with this is obvious. By printing money, and buying these bonds, the central bank devalues the currency. That would have caused commodity price inflation, but for the dramatic fall in commodity-values. It did cause a dramatic rise in asset prices, which set in place a vicious/virtuous circle depending on your point of view. As asset prices rose, yields fell. Speculators, however, are more concerned with capital gain than with yield. That is, why would I be bothered about a piddling 2 or 3% yield on my investment, if instead its price might rise by 10% in a year?

The consequence for pensions, and pensioners then is fairly clear from this. If I pay £100 a month into my pension fund, that is £1200 a year, and £48,000 over 40 years. If inflation remains effectively zero during all this time, my wages and my contributions will remain the same. By the same token, if the average price of a share or bond is £1, my pension fund will have in it £48,000, and assuming each share pays £0.05 in dividends, it would be able to pay me £2400 a year pension.

However, if due to money printing, although consumer price and wage inflation remains the same, but share and bond prices bubble, the situation is very different. Assume over the 40 years share prices quadruple, so that the average price paid for a share over the period is £2. In that case, I will only have bought 24000 shares. Those shares will its true, be nominally worth much more – 24,000 x £4 = £96,000, but the income generated by each share will be no different, so I will now receive 24,000 x £0.05 = £1,200, or half the previous pension. The difference is because the rising share price means my pension contribution buys fewer shares – what financial analysts call pound cost averaging – so fewer shares get transferred to workers, and more remain in the hands of capitalists.

In fact, if share and bond prices had not bubbled over the last 30 years – the Dow Jones Index has risen from 1,000 to over 15,000 in that time! - workers pension contributions would have bought them a majority stake in pretty much the whole of British Capitalism. As it is, the £800 billion in workers pension funds is equal to the share capital of about 75 of the FTSE 100 companies. This is part of the process that Marx described in Capital of the shift from the monopoly of private capital to the introduction of collectively owned, socialised capital via the Joint Stock Companies and Co-operatives. It is what he means when he said in Capital,

“The credit system is not only the principal basis for the gradual transformation of capitalist private enterprises into capitalist stock companies, but equally offers the means for the gradual extension of co-operative enterprises on a more or less national scale. The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other.”

Even though workers own all of this socialised capital via their pension funds, they have no control over it. A central demand of socialists and the TUC should be to demand democratic control over our pension funds. If workers should be given a democratic control over their TU subs, being used for political purposes, and, of course, they should, then even more should they have control over the huge sums in their pension funds. In fact, such control would have a further benefit, because if workers had control over these funds, and through them the companies they work for, they could begin to use their pension contributions not to buy shares, that are subject to the vagaries and speculation of the stock market, but to invest directly in additional productive-capital.

The central dilemma the central banks face is this. They need to keep printing money to stop these bubbles of asset prices bursting, because the commercial banks balance sheets are stuffed full of shares, bonds and property, whose value is grossly inflated. If these assets on the banks balance sheets were valued realistically, then all the banks would be seen to be insolvent. They would need possibly trillions of pounds to recapitalise them across the globe. But, if they keep printing money under current conditions they will increase inflation. That means that potential buyers of bonds will offer less for them. Yields will rise sharply, and with it, will come a bursting of those asset price bubbles anyway, as home buyers can't pay their mortgages and so on.

The indications of rising inflation are already apparent. China has hit capacity constraints. Wages have been rising by up to 50% a year recently, as the demand and supply for labour-power has tilted in favour of the workers. China has begun to look for cheap labour as an alternative itself in Vietnam, Africa and so on. Rising inflation in China, is the main reason the state has deliberately cooled the economy to prevent over heating. But, the Yuan has also been rising, which means that the importers of these previously cheap Chinese goods will face a double whammy of rising prices. The policy of money printing, which devalues the currency itself increases inflation by increasing import prices, for things like food, energy and so on, which is one reason the UK has had much higher than target inflation for the last 5 years.

In the last part I will examine the options this situation presents. Will it be deflation, and depression or as some, such as Moneyweek have predicted will it be Weimar style hyper inflation?

Back To Part 10

Forward To Part 12

Marx and The Falling Rate Of Profit

There has been a lot of discussion recently about Marx's theory of the Law of the Tendency For The Rate of Profit to Fall.  Most of the discussion is based on dogmatic nonsense that treats Marx's writings as though they were some kind of Bible, statements from which are to be repeated as mantras, rather than as a toolbox, to provide socialists with tools to actually analyse the world around them as it is in their time, not as it was in his.  The claims of some of these dogmatists that the falling rate of profit is the main, cause of capitalist crises is baloney, and the claim that it is the ONLY cause of capitalist crises is ridiculous, as even a cursory reading of Capital would indicate.

Many of these dogmatists are the same kind of catastrophist who believe that capitalism is either continually in some form of crisis, or else that it is always imminently about to suffer some such devastating crisis.  They snatch at individual pieces of data, and pretend that they are in some way generalisable into such a global crisis of capitalism.  So, despite the fact that the global capitalist economy has for the last 13 years being going through an unprecedented boom, they have to pretend that in some way that boom has not happened, has not been real, or at the least that the financial crisis that has affected Europe and North America since 2008, is the same thing as a global capitalist crisis.  It is an almost racist view in terms of its Euro-centric, and even just Anglo centric interpretion of what constitutes the modern global economy.

"Is it 'cos we's not white that you dis our economic
performance and still see us as colonials?"

It ignores the fact that China is about to become the world's largest economy, and already is the largest market for many goods, and that its huge economy is growing faster in absolute terms than at any time in its history.  It ignores the fact that many other Asian countries now way beyond, the original Asian Tigers, economies like Vietnam, Indonesia etc. are growing at an extremely rapid pace. It ignores the fact, that there are now an increasing number of African Lion economies economies that are growing even faster than China, and not just on the back of sales of primary products.  The extent to which the economic development in these economies is more or less dismissed and ignored by many on the Left might prompt an Ali G type response of "Is it cos we's not white?"  Indeed, for many of these dogmatists, they cannot yet come to terms with the failure of the other element of their dogma, that these former colonies are no longer such!  Colonies can't liberate themselves without Socialism and Permanent Revolution, that's the law, so the facts must be wrong!

If its any consolation for them, there is a good reason why the global capitalist economy hasn't been in a catastrophic crisis for the last period that is consistent with their view on the falling rate of profit.  It is that the rate of profit has been rising for the last 30 years, and more recently in fairly dramatic style.  But, they can't believe that either.  Its rather like the Stalinists after WWII.  They continually insisted that living standards in the West were really falling when it was as clear as the nose on your face that living standards were rising rapidly.  Some Marxist economists only came to terms with the fact that Capitalism wasn't about to collapse, and had been going through a boom, just at the point in the late 60's, when that Long Wave Boom was coming to an end!

The fact is that the rate of profit rises during periods of Long Wave Boom and of Downturn, and it also falls during those periods too.  It rises during the Winter (downturn) Phase as capital is devalued (there is also a nonsensical view that capital has to be physically destroyed, for example during WWII, for the rate of profit to rise.  It doesn't.  Such destruction makes profit making more difficult.  It is the destruction of the value of the capital, not its physical destruction that has to occur).  Also during the Winter Phase, the value of Variable Capital falls, the rate of surplus value rises, and new forms of production are introduced that raise productivity.  The rate of profit also rises during the Spring (boom) Phase, as new forms of production are implemented on a wider scale, new industries based on high value, high profit production is introduced, and capital expands so that it enjoys not just a rising rate, but also volume of profit.

For the reasons I have set out in recent posts the rate of profit falls during the Summer and Autumn Phases of the Long Wave.  It is not the rate of profit that makes crises more or less likely, or makes the severity of those crises more or less, but the phase of the Long Wave.  For example, in the period of the post war boom, when the rate and volume of profit was rising fast, there were still 5 recessions.  But, the phase of the Long Wave meant that Keynesian intervention was able to cut those recessions short.

There is no reason why a very long term tendency such as the falling rate of profit should have any real effect on causing capitalist crises.  Just how remote it is from such events, is indicated by Marx's description of it.

"In spite of the great changes occurring continually, as we shall see, in the actual rates of profit within the individual spheres of production, any real change in the general rate of profit, unless brought about by way of an exception by extraordinary economic events, is the belated effect of a series of fluctuations extending over very long periods, fluctuations which require much time before consolidating and equalising one another to bring about a change in the general rate of profit. In all shorter periods (quite aside from fluctuations of market-prices), a change in the prices of production is, therefore, always traceable prima facie to actual changes in the value of commodities, i. e., to changes in the total amount of labour-time required for their production...

In view of the many different causes which make the rate of profit rise or fall one would think, after everything that has been said and done, that the general rate of profit must change every day. But a trend in one sphere of production compensates for that in another, their effects cross and paralyse one another. We shall later examine to which side these fluctuations ultimately gravitate. But they are slow. The suddenness, multiplicity, and different duration of the fluctuations in the individual spheres of production make them compensate for one another in the order of their succession in time, a fall in prices following a rise, and vice versa, so that they remain limited to local, i. e., individual, spheres. Finally, the various local fluctuations neutralise one another. Within each individual sphere of production, there take place changes, i. e., deviations from the general rate of profit, which counterbalance one another in a definite time on the one hand, and thus have no influence upon the general rate of profit, and which, on the other, do not react upon it, because they are balanced by other simultaneous local fluctuations. Since the general rate of profit is not only determined by the average rate of profit in each sphere, but also by the distribution of the total social capital among the different individual spheres, and since this distribution is continually changing, it becomes another constant cause of change in the general rate of profit. But it is a cause of change which mostly paralyses itself, owing to the uninterrupted and many-sided nature of this movement.

2) Within each sphere, there is some room for play for a longer or shorter space of time, in which the rate of profit of this sphere may fluctuate, before this fluctuation consolidates sufficiently after rising or falling to gain time for influencing the general rate of profit and therefore assuming more than local importance. The laws of the rate of profit, as developed in Part I of this book, likewise remain applicable within these limits of space and time." 

Vol III, Chapter 9

So, with Marx here talking about changes in the rate of profit normally having only localised effects, with it moving up, down sideways, and only manifesting itself indirectly, and after very long periods, its hardly any rational basis to claim it as the main let alone the ONLY cause of capitalist crises!

The End Of Britain?

This video has been produced by Moneyweek Magazine.  Moneyweek is part of the Agora Publishing Empire whose publications are ideologically sympathetic to "Libertarian" (Anarcho-Capitalist) ideology, and Neo-Austrian Economic theories of Von Mises.  I've already dealt with much of the main thrust of the video whose ideology flows from the above.  For example, although they admit that private debt in Britain is much worse than Public Debt, most of the film is about the Public Debt.  They admit that when many of the basic elements of the Welfare State, such as the State Pension were introduced at the beginning of the last century, most workers were never going to benefit from them, but they don't base their argument on the idea that for years workers were paying for something they didn't get, instead they base it on the idea that now workers might actually get back something of what workers for the last few generations have paid in!

The figures for total public debt look scary, but are misleading.  The total figure including for future pensions etc. is very misleading, because it lumps all of those future payments into one sum as though they were liable to be paid now.  They are not, they only accrue over the next several decades, and during that time, the country will have income to cover them, so measuring it against just one year's income is rather disingenuous.  In fact, as I showed some time ago, as a percentage of GDP, Public debt today at around 70%, is way below the 250% figure it was at after WWII, when the economy was still able to grow strongly and build the welfare state.  It is well below a similar 250% figure it reached ahead of the Industrial Revolution, as the country borrowed to produce the primary capital accumulation it required, and to build the infrastructure that a modern capitalist economy of the time required.

However, the Austrian School has always had some links with Marxism.  Some of its originators were actually admirers of Marx, even Marx's fiercest critic of the time - Bohm-Bawerk - gave some praise to Marx, whilst Marxist economists like Rudolph Hilferding were students of Bohm.  The neo-Austrian theory of the crack up boom is almost lifted entirely from Marx's analysis of the role of credit in exacerbating crises.  The difference is that for Marx, the credit was a secondary issue, with the real basis of the economic crisis residing in the relations of capitalist production, whereas for the Neo-Austrians, capitalism would work just fine if only the state would keep out of the way, there would be periodic cycles, but they would be mild and quickly self-correcting.  It is the state, and its activities, such as borrowing which are the external influences which cause the crisis.

But, having said that, they do have some useful insights, and a significant problem facing developed economies at the moment is debt - though mostly private debt, and in particular bank debt, built up on the back of speculation in property etc.  So, its worth watching.  I'll be dealing with some of its other points in future posts.

Northern Soul Classics - Cu Ma La Be-Stay - Chubby Checker

Another hot 60's summer classic from the early Torch days.  More from the mid week sessions.  But, a change for the Summer.  Chubby Checker, of course well known for the Twist, but for several great Northern classics too.

The Rates Of Profit, Interest and Inflation - Part 10

Inflation (2)

Having described the underlying basis of values and prices, in Part 9, we can then understand what has happened over the last 30 years, and what the changed conditions now suggest will happen in the coming period. Over the last 30 years, there has been a revolution in production. Not only have massively more productive means of producing been introduced, that have slashed the labour-time required for the production of many commodities, but whole new dynamic economies in China and elsewhere have developed, which have had access to vast reservoirs of labour-power.

The latter does not, in itself reduce the value of commodities. If the labour-time expended in production of new value is 10 hours, then that is the amount of new value added. It does not matter whether this new value is made up of 5 hours of necessary labour (paid out as wages), and 5 hours of surplus labour (paid out as surplus value), or whether it is divided 2 hours and 8 hours. However, in practice, as Marx described in Volume I, under certain conditions, provided commodities can be sold at a profit, the seller can sell the commodity below its value, thereby benefiting from gaining market share. With very low wages, and high levels of profits, that is precisely what capital in China, and other low-wage economies were able to do. That does then have a depressing effect on price levels.

Yet, despite these downward pressures on prices, there has been no massive global deflation. The rise in the circulation of commodities has been phenomenal in line with the massive increase in productivity, and output of use values. In the first decade of the 21st Century, the equivalent of a quarter of all the goods and services produced in man's entire history, were traded. The reason this astronomical increase in production, and reduction in values arising from the growth in productivity did not cause a huge fall in nominal prices is quite clearly that set out by Marx above – it was offset by an even more massive increase in the amount of money tokens, and credit thrown into circulation.

That meant that consumer goods prices not only did not fall, but rose slightly, which is a basic requirement of the giant oligopolistic producers, for whom falling nominal price levels are lethal. That is why capital established central banks to operate monetary policy to prevent such deflation. But, the other consequence was as stated in an earlier part, that large amounts of surplus value that was not used for capital accumulation, was converted by this money printing into even more money tokens that then sloshed around in the circuit of money. It bought things whose value – in so far as they have value – could not have been reduced by the same processes that reduced commodity values.

A share, for example, does not have value. It is not something that is produced by labour. It has a price, because it is bought and sold, and because it is in reality a claim on something that does have value – the capital of the firm a share of which it is. But, the prices of these shares rose, not because the value of the capital they represented had risen. In fact, because that capital is made up of commodities, whose value had fallen, the value of the capital itself had fallen. The same is true of Bonds, be they Government Bonds or Corporate Bonds. They are only claims on a share of future income either of the state or of a company. Similarly, with land. Land has no value. It is not produced by labour, any more than air, or water. Land has a price, only because some human beings have laid claim to it, and because being in limited supply, those individuals can then exercise a monopoly over it. The price of land should be merely the equivalent of its capitalised rent.

But, the vast amount of money printing, along with the money hoards created by the huge rise in the rate of profit, meant that all of this money then competed after these limited assets, pushing their prices up to astronomical levels in classic bubbles such as those seen in the past. Because sitting behind those bubbles, and at the centre of the web of the circuit of money sits the banks, the potential collapse of those bubbles in 2008, meant that it would bring the banks down with it. Especially given the political influence that the banks had obtained over the last 30 years across the globe, it is no wonder that the State everywhere intervened to save the banks at the expense of the workers and middle class.

In 2008, as in 1847, all that was needed to overcome the credit crunch was the provision of liquidity. There was no real underlying economic crisis in 2008 any more than in 1847. That can be seen by the typical “V” shaped recover that took place. The continuance of money printing since then has had nothing to do with preventing an economic crisis, therefore, but has been solely a matter of saving the banks themselves. 

In the economies of Europe and North America, there are undoubtedly a large number of zombie companies that were only established, and have only continued because of the low interest rates, and low wages that were established over the last 30 years. But, these companies are rather peripheral. They are the kind of small company that continually is thrown up and quickly disappears in the general ebb and flow of the capitalist cycle. Usually, as they go bust, their capital is picked up on the cheap by bigger or more effective owners, who can use it more effectively. But, in general there is no crisis of solvency for capital in these economies. On the contrary, although they are overall in relative decline compared to China and elsewhere, the rates of profit of companies in these economies, particularly for those companies engaged in high value production, have benefited over the last 30 years from the same massive rise in the rate of profit that has occurred globally. That is why these companies themselves have huge cash reserves.

That is not the case with the banks. Because the banks engaged in all of this speculation to a massive degree, they are more or less all insolvent. That is why in 2008, states stepped in to provide capital for the banks, not just liquidity to the system. The example of Anglo Irish Bank shows how the banks have hidden the extent of their debts, and thereby obtained capital from the state. The collapse of the banks in Cyprus was another example. But, what happened in each of these cases is true of pretty much every bank across Europe. It is only a matter of what particular circumstances bring to light the insolvency of any particular bank, or group of banks.

I've described the extent to which Deutsche Bank is exposed to derivatives reported to be €55 trillion, or equal to the global GDP. But, I've also pointed out that there are several countries across Europe, most notably Luxembourg, whose banks are in an even more precarious position than were those in Cyprus. Even in the US, where large amounts of additional capital were put in, they are still susceptible because the level of student debt alone in the US stands at $1 trillion, more than the total credit card debt. Meanwhile, in the US, its housing market, which has shown signs of the same kinds of speculation that blew up the crisis in 2008, last month showed signs of weakness. Existing homes sales dropped, and the immediate cause seems to be that interest rates are rising.

Across Europe, the banks are exposed to vast amounts of private debt, largely related to property loans. With interest rates rising property prices are set to be hit across Europe, including the UK once again, and that poses a major threat to the banks. That is why George Osborne has been trying to prevent a house price collapse in Britain, by pumping even more money into it, exposing taxpayers to a substantial risk, and encouraging people to go into even more debt. But, Britain's banks are one of the most exposed to such property debt not just in Britain, but across Europe, as was highlighted in Moneyweek .

As interest rates inevitably rise, for the reasons previously discussed, this makes the banks once more susceptible to widespread insolvency. Central Banks are trying to prevent that by continued money printing, and Government's, like that in Britain, are trying to protect them by goosing the property market to prevent a collapse, even as they then put the solvency of the state itself at risk, as happened in Ireland and Portugal, and Greece, and Cyprus, and as looks likely in Spain, and possibly France. But, the conditions that allowed that to continue have ended. In the next part, I will examine what a continuation of this policy means for inflation, and what a collapse of the policy will entail.

Back To Part 9

Capital II, Chapter 4 - Part 8

Natural Money and Credit Economy

Marx then describes why it is the mode of production, not of exchange which is decisive.

A natural economy is one where the producers essentially produce only for their own consumption needs. But, an economy that also produces commodities will require money to facilitate their exchange. An economy that has gone beyond simple commodity production and exchange will develop credit-money as a means of exchange.

But, in reality, credit-money is only a development of money itself. Credit-money cannot exist without money itself. The division, therefore, is actually between natural economy on one side and money-economy and credit economy on the other. Yet, money can act as a means of exchange in a variety of economies from primitive tribes through slave production to capitalism. By the same token, natural economy can be used as a description of all sorts of different modes of production.

If the form of exchange can be the same across all these different types of society, it cannot act as a useful means of analysing these different modes of production.

“Consequently what characterises capitalist production would then be only the extent to which the product is created as an article of commerce, as a commodity, and hence the extent also to which its own constituent elements must enter again as articles of commerce, as commodities, into the economy from which it emerges.

As a matter of fact capitalist production is commodity production as the general form of production. But it is so and becomes so more and more in the course of its development only because labour itself appears here as a commodity, because the labourer sells his labour, that is, the function of his labour-power, and our assumption is that he sells it at its value, determined by its cost of reproduction. To the extent that labour becomes wage-labour, the producer becomes an industrial capitalist. For this reason capitalist production (and hence also commodity production) does not reach its full scope until the direct agricultural producer becomes a wage-labourer. In the relation of capitalist and wage-labourer, the money-relation, the relation between the buyer and the seller, becomes a relation inherent in production. But this relation has its foundation in the social character of production, not in the mode of exchange. The latter conversely emanates from the former. It is, however, quite in keeping with the bourgeois horizon, everyone being engrossed in the transaction of shady business, not to see in the character of the mode of production the basis of the mode of exchange corresponding to it, but vice versa.” (p 119-20)

Back To Part 7

Forward To Part 9

The Rates Of Profit, Interest and Inflation - Part 9

Inflation (1)

I have described the nature of prices. On this basis, it is obvious that the price of any individual commodity, depends on two things 1) the value of the commodities whose price is being measured, and 2) the value of the money that is the unit of measurement. If the value of money is constant, and the value of any commodity rises, then its price will also rise, because it will require more money to exchange with it as an equal amount of value, and vice versa. If the value of any commodity is constant, but the value of money rises, then the price of the commodity will fall, because less money now has to be exchanged with it to represent the same amount of value, and vice versa.

However, things are slightly different when we come to look at the general price level, which is not just a matter of the value of commodities, but the quantity of them being circulated, and the money used to circulate them. That comes down then to four things 1) the average value of each commodity, 2) the number of commodities to be circulated, 3) the value of money, and 4) the velocity of circulation of the money. This last is the number of times any individual piece of money is used in a given time, e.g. in a year a single £1 coin might be used to make ten individual £1 purchases, thereby it has circulated £10 of value.

However, because any society as described in the link above, has a limited amount of labour-time to expend, if the value of commodities rises in general, i.e. productivity falls, so more labour-time is required for their production, this does not result in an overall increase in the amount of value produced. If a society has 1 billion hours of labour-time to expend, and produces 1 billion units, the value of each unit is equal to 1 hour. If 1 hour is equal to £1, and the velocity of money is 1, it requires £1 billion to circulate those units. If, productivity falls by half, the society still only has 1 billion hours to expend. It now produces 500 million units, but their value is still 1 billion hours, equals £1 billion. The value of each unit is now 2 hours, equals £2, and so £1 billion is still required to circulate these commodities. However, if the money is gold, and is affected by the same fall in productivity its value too will have doubled. If £1 previously equalled 2 grams of gold, now it will equal only 1 gram of gold. So, in terms of the amount of gold that has to be handed over, things will be as they were before i.e. 2 grams of gold will exchange for 1 unit of production.

It is this relation of the value of one commodity to the quantity of the money commodity that is the real price. In this case, then its clear that there is no inflation of prices, the same amount of gold continues to be exchanged for a unit of production as before. What is different is that the amount of production has fallen, i.e. the society has become less wealthy in the real sense that it now has fewer use values produced.

However, if the value of the money does not rise then the nominal money prices will double. By the same token, if the value of commodities remains constant, but the value of the money drops by half, the nominal money prices will double. For example, when Spain began to bring back stolen gold from the Americas, it reduced the value of gold in Spain, so prices rose there. The same thing happened with commodity prices in Europe, when new gold fields in California, Australia and Alaska were opened up, which required much less labour-time to produce gold than was previously the case.

But, as Marx points out, when precious metals are replaced by money tokens, such as bank notes, this reality can be obscured. A paper note, or a metal token, has very little value, and yet represents a certain amount of gold with a lot of value. If the value of gold rose, or the value of commodities fell, so less gold was needed in circulation, it was naturally withdrawn, to be hoarded, exported or melted down for bullion as I describe here – Marx, Gold and Money. But, that is not the case with money tokens, precisely because they have no or little value themselves. Marx says,

“Gold circulates because it has value, whereas paper has value because it circulates. If the exchange value of commodities is given, the quantity of gold in circulation depends on its value, whereas the value of paper tokens depends on the number of tokens in circulation. The amount of gold in circulation increases or decreases with the rise or fall of commodity prices, whereas commodity prices seem to rise or fall with the changing amount of paper in circulation.”

This is the basis of inflation. The paper tokens, or nowadays the credit money in circulation represent a certain quantity of the money commodity – gold – which in turn should not be fetishised, because it only represents a certain amount of social labour-time. In other words, the total value of commodities in circulation represents a certain amount of social labour-time required for their reproduction. If gold is the money commodity, then the value of gold in circulation has to be equal to this same amount of labour-time, divided by the velocity of its circulation. The gold simply represents an equal amount of social labour-time, its physical embodiment in a form that can be used for exchange. On that basis, gold is not needed at all. All that is required is some universally accepted token that equally represents the same amount of social labour-time as the gold it has replaced.

However, as Marx points out here, if more of these tokens representing social labour-time are put into circulation than are required to circulate these commodities, one of two things must happen. Either, the velocity of circulation of each token must slow down, or else the value of each token will fall. The velocity of circulation can slow down, if general economic activity slows down, so fewer transactions occur, and each money unit then performs fewer transactions. Moreover, depending on other conditions, so long as the tokens are felt to still be stores of value, they can themselves be hoarded. But, in general the velocity of circulation tends to be determined more by technical considerations. For example, new banking technology means that payments can be made much faster using electronic transfers.

In short, if the value of commodities remains constant – they require the same amount of labour-time to produce – then increases in the supply of these money tokens/credit, will cause the value of the money tokens to fall, and so this will result in higher nominal money prices – inflation. On the other hand, if the opposite happens, as Engels describes in relation to the 1847 crisis, described in Part 6, and money is drained from the system, which is what happened as a result of the 1844 Bank Act, then a deflation of prices sets in, nominal prices fall, which causes people to hoard money even more, and it causes a credit crunch, as short term interest rates are forced up, as happened in 1847, and happened in 2008.

As Marx and Engels point out this kind of financial crisis, caused in the realm of money has to be separated from an actual economic crisis, which also appears to arise from a lack of money, but has other causes within the realm of production and circulation. In the next part, I'll explain what this means for the current situation.

Back To Part 8

Forward To Part 10