Monday, 1 July 2013

The Rates Of Profit, Interest and Inflation - Part 1

He didn't bring about low interest rates, nor have his foreign
equivalents and successors.  According to Marx, interest rates
are determined by the relation of the supply of money-capital to the
 demand for money-capital.  Central Banks can create money
but they cannot create capital.  Capital can only be produced by the
production of surplus value.  In the last 12-15 years there has been
massive capital accumulation, globally.  Global Fixed Capital Formation
doubled in the first decade of this century.  Yet, huge money hoards
have arisen also.  That is only possible if the volume of surplus value
grew massively, which itself could only occur on the back of a huge rise
in the Rate of Profit.
The thesis of this series of posts is that the view, held by most economists, that interest rates are low, due to the role of money printing (Quantitative Easing), by Central Banks, and primarily the US Federal Reserve, is wrong. The real reason that interest rates are low, and have been falling for 30 years since the early 1980's, is because there has been a growing disparity between the supply of money-capital, and the demand for money capital. The reason for that, during most of this period has been a rising global rate of profit, and in the last 12 years or so, a growing absolute volume of profit. Despite, in the last 15 years, there being an enormous amount of capital accumulation in the global economy, out of that profit, the volume of profit has been such that vast sums still accumulated in money hoards, at various points in the global economy, manifest in huge cash balances on corporations balance sheets, and in vast sovereign wealth funds held by surplus economies.

Current estimates of the Rate of Profit are not the same as
those Marx used.  Marx's Rate of Profit was based on the
ratio of surplus value, multiplied by the number of times
the capital was turned over, to the total value of capital used to
 produce it.  Current measures are based on National Income
data (V+S) rather than National Output Data (C+V+S).
They measure S/V, which is only the rate of surplus value.
Consequently, they miss the effects of reductions in the value
of constant capital, brought about by increases in productivity
and revolutions in technology.  Finally, these estimates take
no account of the rate of turnover of capital, which Marx
and Engels describe as having a crucial role.
A further element of the thesis is that estimates of the rate of profit significantly understate its rise. One reason for that is that is that they focus on the relatively declining economy of the US. Another is that these estimates of the “Rate of Profit” are no such thing. They are all estimates of the Rate of Surplus Value. That is because they are based on National Income data, rather than National Output data. The conventional thinking is that National Income and National Output are the same thing. They are not as Marx demonstrated. The other reason these estimates are wrong related to that is that they miss the significance of the role of technology during the last period in reducing the value of constant capital. As I have pointed out elsewhere, estimates of the rate of profit also miss the shift in the nature of production and consumption towards service industries, especially those based on the use of high value, complex labour, and which, therefore have a lower organic composition of capital, creating a tendency for the rate of profit to rise not fall. Finally, estimates of the rate of profit ignore the consequences of increases in the rate of turnover of capital. I estimate that current measures of the “rate of profit” need to be increased by a factor of 3, compared with the same measure from 1950.

He will not be able to stop UK interest rates rising alongside
global rates, as the demand for capital rises relative to supply.
  He will not be able to stop the crash of financial asset prices and
property prices that follow from that rise, or the devastation
it will wreak on the banks, whose balance sheets are still
stuffed with zombie property loans backed by phoney property
Finally, the other element of this thesis is that because it has been the above causes that have given rise to historically low interest rates, any change in those conditions, which brings about a reduction in the supply of money-capital relative to demand is likely to see global interest rates rise, whether central banks pursue a policy of money printing or not. Such policy measures may have short run effects on short-term interest rates, but only at the expense of increases in inflation, which will raise long-term interest rates, causing a sharp rise in the yield curve.

I believe, as I have set out previously that such a change is under way. There are clear signs that there has been a conjunctural shift in the Long Wave Cycle from its Spring Phase, to its Summer Phase. That would also conform with previous durations of the cycle. The “Boom” and “Downturn” periods of the cycle are on average 25 years each in duration. The former is divided into its Spring Phase of around 12-13 years, characterised by high rates and volumes of profit, vigorous growth, and high levels of productivity. If as I believe, it began in 1999, it was due to end some time around 2011/12. The Summer Phase lasts for a similar period, and is also characterised by above average growth, but productivity slows down. More capital has to be accumulated to bring about the same level of growth, and consequently the rate of profit falls, though the volume of profit may continue to rise. The supply of capital relative to demand falls, causing interest rates to rise.

Once again, I believe that evidence can be seen for these trends. One major example, is the development of shale oil and gas in the US. Faced with large rises in the prices of inputs – themselves in large part caused by the global boom since 1999 – capital has to find cheaper alternatives. The US, highly dependent on energy, had more reason to do so than many other economies. Shale oil and gas are providing it with an energy bonanza that has brought its energy prices down considerably. But, the investment of capital in this new industry are themselves enormous. That in in itself causes a large rise in the demand for capital. Other countries like the UK are engaging in similar large scale capital projects. Indeed, the UK is being forced to because of recent reports that without them, the lights will go out in the next couple of years.

But, there is other evidence of this shift too. One element of the Spring Phase of the Boom, is that new technology developed during the previous Innovation Cycle, becomes incorporated as base technology in both new products, and in new productive techniques. A classic example of the former has been Apple, which became the world's most valuable company on the back of a continual round of innovation, and introduction of new products. These new products, are both high value/high profit, and also because they are new, have an almost limitless potential for demand for them. But, there are clear signs that the pace of innovation of these products is slowing down. Many of Apple's “new” products are just new versions of old products, and the innovations within them are becoming less too. The more the range of products is shifted towards mature rather than new products, the more those products face crowded markets, where it is more difficult to sell at higher prices, and consequently the rate of profit generally tends to be lower.

Over the next few posts, on this thesis, I will be setting out these ideas in more detail.

Forward To Part 2

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