Wednesday, 17 July 2013

The Rates Of Profit, Interest and Inflation - Part 6

In previous posts, I've set out the extent to which the rate of profit has risen, over the last 30 years. That rise, in the rate of profit, provided the basis for a significant accumulation of capital. Whole new dynamic economies developed, in China, India and other parts of Asia and Latin America. Additionally, whole new industries developed, in the same way they have done in the period ahead of Long Wave Booms previously. These new industries were based on the microchip, and the range of technologies it made possible, as well as new industries in the realm of biotechnology and gene technology. Many of these developments had themselves only been possible because of the massive increase in technological and analytical power that the development of the microchip brought with it. The other major area of development, that the microchip brought, was in the area of communications, most notably in the area of the Internet, and mobile communications technology. A further and related development has been that of space technology, and the use of satellites for an increasing range of services.

It would take a very long time just to list and discuss all of the huge range of products that have developed in the last 30 years, and even just in the last 15-20 years, that prior to that time only existed in the realms of science fiction. A modern mobile phone has the same kind of functionality that, in the 1960's was depicted in a Star Trek communicator of the 24th Century. It has more computing power than, at that time, would have only been possible in a mainframe computer occupying a sizeable room. In fact, the pace of development has been such that the personal computer, which even just 20 years ago was something only the technophile few possessed, has gone through the stage of becoming a household object to now being itself on the verge of becoming obsolete, as it is replaced by a range of more portable alternatives, by smart TV's etc. with the same kind of functionality.

In that way it will have gone the same way as the other development of the 1990's, the CD, which shot to stardom as a replacement for vinyl records, and cassette tapes, and has now been replaced by instant downloads, or the capacity to store tens of thousands of songs on a memory stick. A similar revolution in productive technique and technology has occurred during that time too. I remember in the mid 1980's, going to the “Which” computer show in Birmingham with a LP comrade who was a technical author with International Computers. I was quite impressed with a CAD/CAM system that was being demonstrated. But he told me he was working on software that would itself create the software that ran such CAD/CAM systems. Today, those kinds of things are taken for granted.

All of these developments, as they have with every previous Long Wave Boom, have been not only the basis of the technology that has driven a revolutionising in productive technique, in communications etc. that have slashed the turnover time of capital, and thereby raised the rate of profit, but have also been the basis of that vast new array of commodities that create new markets, new opportunities for trade, new high value, high profit areas into which capital can enter and exploit new layers of wage labour. That has been the basis of the explosion of new commodities brought into production, of the massive reduction in the value of many existing commodities, including of the means of production, and of the massive rise in the rate of profit.

But, if this Long Wave cycle follows the course of all those in the past, then these developments have a limited duration. At some point, the productivity gains begin to slow down, so that the reductions in value slow down with it. In order to obtain the same increases in output proportionately more fixed capital has to be employed, and or more labour-power. As the demand for labour-power continues to rise, the balance of supply and demand tilts more in favour of workers, who are able to obtain a higher income share. Although, at around the same time, the new supply of raw material production begins to come on stream, reducing or slowing the rise in primary product prices, the savings previously obtained from more efficient use of materials, begin to disappear for the same reason that other productivity gains lessen.

The consequence is that in order to maintain growth, firms have to advance larger amounts of capital. The volume of profit rises still, and economic growth remains robust, but the increase in profits fails to keep pace with the increase in the capital employed to produce it so the rate of profit falls. At the same time, the number of new products coming on to the market slows down, and many of those that appear are increasingly only new versions of existing products, rather than totally new use values. As a consequence the profile of available commodities moves more towards mature lower value, lower profit commodities, and away from the newer higher value, higher profit commodities. Moreover, as these markets become more and more satisfied, firms have to lower prices more and more to encourage consumers to buy them, or to replace existing commodities.

An increasing amount of surplus value produced by firms now has to be devoted to trying to develop new commodities, to finding ways of improving quality, of reducing costs by other means etc. Less is available to be distributed as dividends, rents and taxes. That means more surplus value remains in the circuit of capital, and less escapes into the circuit of money. Existing money hoards of potential money-capital begin to be drawn upon to finance expansion and necessary capital investment. For some firms, the only means of achieving the necessary capital is by tapping the capital markets by new share offerings, or bond issues. Money-revenue that has been sloshing around in the circuit of money, pushing up asset prices like shares, bonds and property, is drained into the circuit of capital, and the consequence is that interest rates are forced up.

At the same time that interest rates begin to rise, the issuance of new bonds and shares by companies to raise capital, causes the prices of bonds and shares to fall simply as a result of supply and demand. The fictitious capital that has built up on the back of the lower interest rates is massively devalued, providing a further incentive for money to move away from these speculative areas, and once more back into productive investment.

I have argued in recent months - The Long Wave Summer Has Begun – that we have seen the change in conjuncture from the Long Wave Spring to Summer. That shift represents precisely the kind of transition set out above.

There is clear evidence that productivity gains are declining throughout the global economy. The extent of that should not be exaggerated. We are only at the start of this process. But, the easy pickings of productivity, be they from the new forms of organisation and productive technique introduced in the 1980's, or from the large amount of new technologically advanced equipment introduced in the 1990's and 2000's, or from the large reductions in the cost of constant capital, brought about by the new international division of labour, and sourcing of commodities from low-wage economies, have now been had.

Modern monopoly capitalism competes for market share on the basis of being able to offer increasingly higher quality commodities, new ranges of commodities to attract consumer interest, and which it can sell to them at relatively high margins. It drives profit growth by the kind of continual improvement in technique and productivity described above, which reduces unit costs. But, necessarily when the number of new products begins to slow down, the ability to obtain those higher margins is itself reduced. I commented on the last earnings results of Apple in that regard – Apple Also Confirms Conjuncture. Its profit margin has fallen from 47.4% to 37.5%, a 20% reduction. Apple shares have fallen from over $700 a share to below $400, though they have recently recovered to just over $400. Apple is just a bell weather of this transition.

This development also has to be put into the context of the concrete situation that has existed after the financial meltdown of 2008. In Volume I of Capital, Marx describes the difference between the kind of financial crisis that occurred then, and an actual economic crisis.

“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) 

But the size of that crisis certainly did react indirectly on the real economy. It did so because it meant that the circulation of money ceased – a crisis of liquidity not solvency – and without the circulation of money, neither commodities nor capital can circulate. Engels, in Volume III of Capital describes the kind of monetary as opposed to economic crisis Marx is referring to, in relation to the crisis of 1847.

It occurred during a period of boom. Profits and profit rates were soaring, as Britain sold unheard of amounts of goods into the world market. But, Britain and Ireland then faced crop failures, including the Irish potato famine. There was a need to increase food imports substantially, but these could not be financed by even more exports. So, they were paid for by gold from the Bank of England, and the commercial banks. This was gold that had been amassed on a large scale from previous exports. However, under the terms of the 1844 Bank Act, money supply was regulated by the amount of gold held in the reserves. So, the amount of money put into circulation was curtailed. It created almost a replica of the situation in 2008, because as less money was put into circulation, so banks and businesses hoarded what cash they did have, they demanded cash payment rather than giving credit, over night interest rates soared. Businesses began to hold off on making purchases.

In the end, the Government suspended the Bank Act so that money could be put into circulation. 

"The government yielded to the general clamour and suspended the Bank Act on October 25, thereby eliminating the absurd legal fetters imposed on the Bank. Now it could throw its supply of bank-notes into circulation without hindrance. The credit of these bank-notes being in practice guaranteed by the credit of the nation, and thus unimpaired, the money stringency was thus instantly and decisively relieved. Naturally, quite a number of hopelessly enmeshed large and small firms failed nevertheless, but the peak of the crisis was overcome, the banking discount dropped to 5% in December, and in the course of 1848 a new wave of business activity began which took the edge off the revolutionary movements on the continent in 1849, and which inaugurated in the fifties an unprecedented industrial prosperity, but then ended again — in the crash of 1857. — F. E.]”

In fact, the massive injections of liquidity provided at the end of 2008 and the start of 2009 had a similar effect. A look at the growth figures of economies shows a typical “V” shaped recovery from the sudden cessation that the financial crisis caused. The failure in places for that to continue in Britain, and parts of Europe has been due to the introduction of austerity measures that withdrew demand from the economy, just at the time when it was recovering. Moreover, the fact that capitalism is experiencing a long wave boom does not suspend the normal business cycle. In the post war boom there were 5 recessions. The 2008 Financial Meltdown coincided itself with the onset of the three year cycle, which causes economic activity to slow for around 4 quarters. That same cycle has caused a slow down from the end of 2011 to the beginning of 2013. That has been reflected in the slower growth in China and other BRIC economies.

However, the extent of that should not be exaggerated either. Much has been made of the fact that Chinese growth is now running at 7.5% compared to the 10-12% it has enjoyed in the past. But, part of the reason for that is Government policy to deliberately slow growth to prevent overheating, and as part of shifting the structure of the economy towards a larger role for consumption. However, the more important thing to note is that, in the last decade, the Chinese economy has doubled in size. In absolute terms, therefore, a 7.5% growth rate today is the equivalent of a 15% growth rate ten years ago! China is growing more today in absolute terms than it was ten year ago, or probably at any other time in its history.

The consequence of this is that this turn in the long wave conjuncture has been combined with a series of events that mean that in places economic growth has been subdued, as businesses in a climate of uncertainty, have curtailed their capital expenditure, which in turn has its economic consequences. In Volume II of Capital, Marx describes a range of causes of crises – which rather undermines the arguments of those crude, deterministic 'Marxists' who believe he had only one theory of crisis based on the falling rate of profit – that can arise at the various points of the circuit.

Later in Volume II, he deals specifically with this kind of situation where capitalists for whatever reason delay their investments in new or replacement fixed capital, what he calls, under-consumption by Department II.

“The opposite case, in which the reproduction of demises of fixed capital II in a certain year is less and on the contrary the depreciation part greater, needs no further discussion.

There would be a crisis — a crisis of over-production — in spite of reproduction on an unchanging scale.”

In fact, what we have seen in the aftermath of the financial meltdown has not been any extensive overproduction of capital on a global scale. A look at the prices of raw materials such as copper shows that they have fallen, but in large part that is due not to a collapse in demand, but to the fact that all of that new supply prompted by the high prices of the previous decade, has now started to come properly on stream. Supply is at least meeting demand, and so prices have stopped rising, and began falling, as would be expected at this point in the cycle. Businesses that have invested billions of dollars in this new production cannot simply mothball it, to reduce that supply, in the same way that say Mars can slow down their production lines to reduce the supply of Mars bars.

That in turn causes a reduction in the rate of profit, because all of those huge mining firms now obtain lower rates of profits on these huge investments. The same is true in other areas. The huge rise in the price of oil brought about by the boom, has prompted the development of shale oil and gas, as well as alternative forms of energy. But, creating thousands of new shale oil and gas wells will itself require the investment of vast amounts of capital – capital that currently does not exist. Shale itself might only provide a breathing space for the next 50-100 years, during which time new energy sources will have to be developed. Investment in wind, solar, nuclear and other forms of energy will continue, again requiring the investment of large amounts of capital that currently does not exist. The progress of companies like Tesla in the US, in developing new generations of electric car, indicate that sooner or later this technology will replace the internal combustion engine, but again that will mean a huge investment of capital in new forms of production.

In most developed economies there is a significant need to invest in infrastructure so that these economies are made fit for the kinds of production and distribution of the 21 st century. That is equivalent to the kind of investment that capital had to make in the 19 th Century in railways, the provisions of stations, depots, docks and other transport and storage facilities. Newer economies have had the advantage of building their economies in conjunction with such infrastructure. But, to compete in a global economy, the older developed economies will have to spend hundreds of billions of dollars on broadband networks, and on smart electricity distribution and so on. Once again, this is capital that currently does not exist.

But, there are other areas in which the advantages of the last 30 years reverse too. A large part of the reason that wage rises were muted in the 1980's and 90's, and yet did not result in massive reduction in real wages, is not just because workers went into debt. A large part of the reason for that is that the value of wage goods fell significantly reducing the value of labour-power. Massive increases in productivity were combined with the explosion of production of manufactured goods by China. But, that same process led even to the massive reserve army of labour in China being absorbed. The normal processes of demand and supply for labour-power described by Marx and Engels, has pushed up Chinese wages significantly over that period. The huge money printing in developed economies to absorb the reduction in values and prevent deflation, had its effect on Chinese inflation, including in the prices it has had to pay for materials and foodstuffs.

As I argued some time ago - Chinese Workers and The State – the era of cheap manufactured goods from China is coming to an end. Wages, and prices in China are rising, and the Chinese currency is rising against the dollar, Pound, Euro etc. In other words, the price of all those imports from China will be rising significantly from here. Instead of having a depressing effect on the value of labour-power they will be having the opposite effect. In the short term, the J-Curve means that there is no possibility of introducing substitutes for these imports, and so those prices will simply rise. Once again that means that the costs of both constant and variable capital rise, at a time when the scope for expanding profits is contracting.

In other words, we have a situation where the demand for capital is going to be rising, whilst the supply of new capital will be rising more slowly than in the past as the rate of profit declines. That does not mean that the absolute volume of profit does not rise, but that the rate at which it rises slows down. The consequence is that less surplus value is available for distribution as revenue, and more has to be accumulated as capital. Shares and bonds must be issued, dividends reduced and so on. Share and bond prices fall as a consequence, and interest rates rise as the demand for capital rises relative to supply.

In the next part, I will look at the consequences of this for interest rates.

Back To Part 5

Forward To Part 7

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