How High Can Stocks Go? - Part 2

Dow Jones Meteoric Rise 1982-2000

I've set out the reason that markets can be inflated during periods of sluggish economic growth elsewhere – Rates of Profit, Interest and Inflation. That is that in a period of long wave downturn, particularly during the Winter Phase, although the rate of profit tends to rise, there are fewer new types of products that capital can be invested in to produce, which can subsequently be sold at market prices that realise the produced surplus value, because the elasticity of demand for these commodities tends to be high, so any increase in supply causes market prices to fall sharply. There is no incentive, therefore, for capital to invest the realised profits in expanding existing production. Realised profits, therefore, become turned into money hoards. Marx describes this process as part of the normal cycle. The weight of this potential money-capital then weighs on money markets depressing interest rates.

Lower interest rates encourage speculation, and to the extent that this speculation, for a time, becomes a self-fulfilling, virtuous circle, more and more of the money hoard is drawn into it. The speculation provides little in the way of sustainable income, but for the speculators, this becomes irrelevant, because they look at their total return, and on that basis, the huge capital gains they make, in very short periods of time, far outweigh what they might have earned in income from productive investment.

A look at the diagram of the circuits of money and capital illustrates this process. The circuit commences at M, where money-capital exists fleetingly only at that point where it is exchanged for productive capital (means of production and labour-power). The productive-capital then engages in production, and the labour-power produces a surplus value in this process. The result is the transformation of the capital-value into commodity-capital, C', which encompasses this surplus value. When it is sold, it realises a money equivalent M', which consists of two parts as does C'. C is the physical equivalent of the productive-capital consumed, it is the capital value of the productive-capital, i.e. its current reproduction cost, whilst c, is the surplus product produced in the production process. Likewise, M is the money equivalent of C, and on this basis, in value terms, capital is always able to reproduce the capital consumed in the production process.

So, Marx writes,

“In calculating the aggregate turnover of the advanced productive capital we therefore fix all its elements in the money-form, so that the return to that form concludes the turnover. We assume that value is always advanced in money, even in the continuous process of production, where this money-form of value is only that of money of account. Thus we can compute the average.” (Capital II, p 187)

Note Marx's terminology here. Firstly he begins by making clear that what he is talking about is “the advanced productive capital”. To make clear it is not the advance of the money-capital used to purchase that productive capital, that Marx is talking of, he then says that what he is doing is only to “fix all its elements in the money-form”. Finally, to make clear that his analysis here is one based on the actual capital-value advanced, and not on the money-capital advanced, he makes clear that the use of money here, is merely a convenience of calculation, and that he is using it essentially only in its role as “money of account”.

Likewise, m is the money equivalent of the surplus product. In simple reproduction, m is spun off, and is used by the exploiting classes merely to purchase their consumption goods, whilst M once more purchases the quantity of C consumed in the production process. But, under expanded reproduction, a proportion of m is used for the purpose of accumulation. Likewise, where under simple reproduction, c takes the form of physical commodities consumed by the exploiting classes, under expanded reproduction, a proportion of c takes the form of means of production, and of additional means of consumption required by the expanded workforce.

As the diagram shows, the capital-value M', in reality, passes into bank deposits (and to an extent company cash boxes), from where it is once more circulated to purchase productive-capital, or means of consumption by capitalists. But, looking at the circuit of money outlined in green, its clear, on the basis of what was said above, that the money hoards rather than being used to buy productive-capital, or to buy consumption goods, by capitalists, can be used to buy financial assets, such as stocks, bonds and property. In the circuit of capital, expanded reproduction means that capital itself expands as a consequence of the production process. Capital expands because more capital has been created. But, in the circuit of money, this is not necessarily the case. Money prices can rise, not because additional value has been created, but simply because additional money has been thrown into the circuit to chase after the same quantity of supply.

If, the number of shares or bonds in issue remains unchanged, if the amount of property remains the same, but additional money is put into circulation to purchase this supply, then the money prices of these financial assets will rise. In Part 3, I will examine, how that occurs according to Marx’s theory, and how it has happened in practice over the last 30 years.

Back To Part 1