Wednesday, 31 December 2014

The SNP's Cleft Stick

Despite their defeat in the Scottish referendum, the SNP seem to have enjoyed some recent success. Their membership has risen sharply in recent weeks, and if the opinion polls are to be believed, they seem to have gained electorally, at Labour's expense. Indeed, if those polls are to be believed Labour faces decimation in Scotland, in the General Election next May, at the hands of the SNP. I doubt things will turn out that way, but even if the SNP does take a large number of seats from Labour, it will find itself in a cleft stick, rather than the driving seat some pundits are suggesting.

The effects may not yet have been seen politically, but the sharp fall in the oil price, must be making many Scottish “Yes” voters, very glad that they were outnumbered by the “No's”. An independent Scotland, today would not be facing the kind of prosperity and end to austerity that the SNP was promising them, just a few months ago. The SNP's economic strategy relied heavily on the continuation of high oil prices, and an increased share of oil revenues going into the coffers of a Scottish government. It was from the beginning the economic policy of a gambler. With the price of oil now half what it was just a few months ago, and heading for at least another 20% fall, and possibly for as much, at least temporarily, for another 50% fall, that gamble would have been exceedingly costly for the Scottish people.

Instead of an end to austerity, it would have meant that Scotland's finances would have faced a massive black hole that it could not have filled other than by austerity on a far more draconian scale than even Osborne has so far implemented, or plans to implement. In fact, even the proposal for giving Scotland more financial independence, ought now to be seen by the Scottish people for the trap that it is, for the same reason. The Scottish people should be highly indebted to Labour, and all those other socialists who warned of precisely that kind of danger ahead of the referendum, and who thereby saved them from the catastrophe that would have followed.

But, there are other reasons why traditional Labour voters in Scotland, are likely not to desert to the tartan Tories of the SNP, in the numbers that are currently being predicted. There are reasons for voting for minority parties in more local elections. In some areas, small parties, like the Liberals, had some potential, to win enough seats, to win control of local councils, particularly on the basis of small turnouts. Even the BNP, at its height, came close to achieving that, in one or two councils. But, there is no chance of any of these small parties winning even a sizeable number of seats, in a General Election, especially given the much larger turnout of the voters of the main parties, which thereby overwhelm the votes of the small parties' core supporters, that are always overstated in low turnout polls. Much of the votes for those small parties is then soft, and always flows back to its natural base in a General Election.

If I were a traditional Labour voter in Scotland, my main concern, whether I voted “Yes” or “No”, in the referendum, would now be to ensure that the Tories were prevented from being elected in Westminster next May. In fact, given the political reality, that Scotland will remain part of the UK, even were I an SNP voter, I would be likely to take a similar attitude. No one, in Scotland, is going to want to be seen, and be held responsible for, allowing Cameron back into No.10, let alone Cameron backed by Farage, or the Ulster Unionists. And, make no mistake, if the election is close, and Labour is deprived of a majority, allowing Cameron back in, because of a loss of seats in Scotland, those Scottish voters will be held responsible, by workers in England, particularly by workers in the north of England, who have suffered, if anything, more from austerity, and without the concessions that Scotland has been given.

But, if Labour is the largest party, its argued, they may be able to form the Government, on the basis of “confidence and supply” provided by the SNP. In other words, there would be no formal arrangement between the two parties, but Labour would be allowed to govern on the basis of SNP MP's voting for Labour's budget proposals, and giving their support in any vote of confidence. This its suggested would give the SNP great leverage, because they would be able to demand further concessions from a Labour government in return for such an agreement.

But, in fact, the SNP would have no such leverage. They have already ruled out the possibility of a coalition or similar agreement with the Tories, because they know, for the reasons set out above, that any such agreement would be toxic for them, for at least a generation, and probably more. They only need to look at the coming liquidation of the Liberals as proof of that. But, a Labour government would have no reason to give any concessions to the SNP under such conditions. The SNP would be holding a gun containing only blanks.

If the SNP refused to support Labour, that would be tantamount to putting the Tories back in government, and would be equally toxic for them, as if they had just given open support to Cameron. In other words, if they win they lose. If the SNP wins a large number of seats and finds itself in this position, it will be forced to support Labour, and may then be held accountable for any austerity measures that a labour government implements. If they refuse to support such a government, they will be held responsible for creating the conditions under which Cameron, or someone worse like Boris Johnson, will be installed in No.10. In any event, under such conditions, there would be another election, in which the SNP would lose votes in Scotland on a huge scale, and not only lose support for the Westminster Parliament, but for the Scottish Parliament too.

The Long Wave - Part 7

Marx, in his analysis of the phases of the business cycle, looks at the way the cycle affects the rate of profit and the rate of interest, and the way these, in turn, react back on production, via the spur to innovation and so on. Those who believe that crises are caused by the law of the tendency for the rate of profit to fall, have it back to front. Crises of overproduction arise because, during a period of boom, input prices and wages can be pushed up sharply, at a time when expanded production of commodities has lowered profit margins, and when production is expanding faster than the market. As Marx sets out in Capital III, Chapter 6 and Chapter 15, this is a period not of rising social productivity, due to technical innovation – the driving force behind the law of falling profits – but a time of extensive rather than intensive capital accumulation. Existing technology is simply rolled out on a much expanded scale.

“Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.”

(Capital III, Chapter 15)

It causes, the reserve of labour-power, in particular, to be used up, so that wages rise to a point whereby the rate of surplus value falls, and no additional labour-power can be employed profitably.

“In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

(Capital III, Chapter 15)

The law of falling profits is not the cause of such crises, but the solution to them, as Marx points out!

“The specific feature about it is that it uses the existing value of capital as a means of increasing this value to the utmost. The methods by which it accomplishes this include the fall of the rate of profit, depreciation of existing capital, and development of the productive forces of labour at the expense of already created productive forces.”

(Capital III, Chapter 15) 

In other words, in order to overcome the problem it faces, which result in crises of overproduction, as labour-power becomes scarce, and wages rise, reducing the rate of surplus value, and as the price of constant capital rises, for similar reasons, capital is forced, once more, to seek solutions to these problems, not simply by expanding production further on the same technological basis, but to engage in the process of innovation, to develop new labour saving technologies that can reduce the problem of a shortage of labour-power, and can develop new technologies that replace existing machines and materials. But, the consequence of this is then to devalue the existing capital, because this rise in productivity causes the value of materials to fall, and brings about the moral depreciation of existing fixed capital. Moreover, the rise in productivity that arises from this innovation, in resolving the problem it faced, of replacing labour, so as to overcome shortages, which caused high wages, and reduced surplus value, creates the conditions for the rate of profit to fall, because it means that, in doing so, the organic composition of capital rises.

Its no wonder that Marx entitles Chapter 15, “Exposition of the Internal Contradictions of the Law”, because what he sets out, within the chapter, is the process, over the cycle, by which new technologies, having been previously developed, to resolve the problems of production, which cause rising input prices, and which cause wages to rise, so squeezing profits, then become rolled out, more extensively, in the new boom period. The new technology resolves these problems, because it creates a relative over-population, by replacing labour – as Marx points out in Vol I, this does not necessarily mean an absolute reduction in existing employment, but the ability to expand production without employing additional labour. 

But, the consequence of this is that the organic composition of capital rises, creating the conditions for a falling rate of profit. In other words, the solution to crises of overproduction, resulting from a high rate of profit that causes over expansion, and a sharp squeeze on profits, is to introduce new technology that brings about a fall in the rate of profit! 

In this process, these new technologies, thereby become the standard technology. As Marx put it,

"During this cycle business undergoes successive periods of depression, medium activity, precipitancy, crisis. True, periods in which capital is invested differ greatly and far from coincide in time. But a crisis always forms the starting-point of large new investments. Therefore, from the point of view of society as a whole, more or less, a new material basis for the next turnover cycle.”

A new period of extensive accumulation, thereby occurs, in which the condition for the operation of the law of falling profits (rising social productivity causing a rising organic composition of capital) is missing, but during which this extensive accumulation, once more begins to create conditions under which the price of materials begins to rise, and during which labour supplies are used up, causing wages to rise, and the rate of surplus value to fall once more, thereby creating the conditions for crises of overproduction. Once more the condition for developing innovations is created, which thereby reduces input prices, and wages, and which simultaneously creates the conditions for the rate of profit to fall.

Those who believe that crises of overproduction are a consequence of the law of falling profits, rather than that the mechanism is the other way around, fail to distinguish between different types of investment, at different periods of the cycle; the difference between extensive accumulation and intensive accumulation.  Crises of overproduction arise due to sharp squeezes on profits during periods of extensive accumulation, which utilises existing technology.  The law of falling profits is a means of resolving such crises, because it is based on intensive accumulation, using new technologies, that increase social productivity, and the organic composition of capital, thereby creating a relative surplus population, reducing wages, and increasing the rate of surplus value, and simultaneously bringing about a devaluation of existing capital.  At the same time, this new technology creates whole new industries, with low organic compositions of capital, and high rates of profit, which creates the basis for a new extensive accumulation of capital.

The crises of overproduction that arose, for example, in the period after 1914 were not due to a falling rate of profit due to the introduction of new technology during that period, that caused social productivity to rise, and the organic composition of capital to rise. On the contrary, the technology used during that period, was already by that time old, having been developed at the end of the previous century. The same was true of the crises of overproduction that affected the global economy in the latter half of the 1970's, and into the 1980's. The resolution of the causes of those crises came precisely from the spur to innovation that led to the subsequent introduction of new technologies.

In the 1930's, for example, those new technologies led to a reduction in the value of constant capital, and labour-saving technology, as well as the development of whole new consumer and producer goods industries based upon them. It is often forgotten, for example, that one reason for the Jarrow Hunger March to London, was to remind workers, in what was, by then, a relatively affluent Midlands, and South-East, based on these new industries, that conditions, elsewhere in the country, were pretty dire.

In the 1980's, the introduction of new technology, for example, in the printing industry, directly undermined the high wages, and organisation of print workers, firstly by creating a whole series of “instant print” workshops across the country, using computer technology for typesetting, and what were now relatively cheap pieces of fixed capital, in the shape of photocopiers and so on. In so doing, this new technology created a relative surplus population, reduced wages, and the value of capital. But, the means for achieving this was to bring about a rise in the organic composition of capital, via a rise in social productivity, and a consequent fall in the rate of profit.

The law of the falling rate of profit does not lie behind crises of overproduction, but lies behind the resolution of such crises, because, by creating the conditions for a new period of intensive accumulation, it creates the conditions for removing the constraints on the expansion of capital that develop on the back of extensive accumulation to its limits. 

Tuesday, 30 December 2014

Capital II, Chapter 20 - Part 40

Marx sets out an example whereby firm X produces yarn using a spinning machine, which suffers this £200 of wear and tear. It reappears in the value of the yarn it produces. Firm X could then use this £200 not to buy the fractional part of a spinning machine that it represents, but instead to buy additional cotton. X buys £200 of cotton from Y. Now Y has £200 with which to buy yarn.

So, in other words, if we consider Department 1 here, as the producer of means of production, then it has to be remembered that these means of production do not physically have to be the same as their value equivalents at any one time. Here £200 represented wear and tear of the spinning machine, but rather than being spent to buy part of a spinning machine, it was used to buy additional cotton. Both are means of production bought from Department 1, but both physically different. The problem then seems to be, what happens when firm X needs to lay out the additional capital to replace its spinning machine, having spent the money set aside for that purpose instead on additional cotton? For this to work, X has to throw £200 of additional money into circulation. 

“But the absurdity is only apparent. Class II consists of capitalists whose fixed capital is in the most diverse stages of its reproduction. In the case of some of them it has arrived at the stage where it must be entirely replaced in kind. In the case of the others it is more or less remote from that stage.” (p 468) 

So, one group is essentially at that stage as companies just setting up in business. That is, in addition to having to lay out capital for all of the materials, and labour-power (circulating capital) it also needs to lay out capital to buy fixed capital. What we have here is essentially the situation that Marx referred to in Volume I, which is the distinction between the money hoard accumulated to replace fixed capital, and the accumulation of surplus value becomes blurred. Here, the money hoard to cover wear and tear has been used for the purchase of additional material (cotton) which thereby represents an accumulation of capital.

At the same time, the other group is made up of companies that are essentially building up money hoards to cover the cost of replacing fixed capital. Marx argues then that if half of the Department 2 capitalists, throwing in their £400 for means of production, do so to cover the purchase of circulating capital, and the other to cover that purchase plus the replacement of worn out fixed capital, it averages out.

“Hence, if we assume that half of the £400 thrown into circulation by capitalist class II for exchange with I comes from those capitalists of II who have to renew not only by means of their commodities their means of production pertaining to the circulating capital, but also, by means of their money, their fixed capital in kind, while the other half of capitalists II replaces in kind with its money only the circulating portion of its constant capital, but does not renew in kind its fixed capital, then there is no contradiction in the statement that these returning £400 (returning as soon as I buys articles of consumption for it) are variously distributed among these two sections of II. They return to class II, but they do not come back into the same hands and are distributed variously within this class, passing from one of its sections to another.” (p 463)

This assumption, however, is clearly false, but worse, there is a logical flaw in Marx's argument here. The assumption itself could only apply if the average life of the fixed capital is only two years. For example, if the average life of the fixed capital were ten years, then on average, in any particular year, it is only 10% of the fixed capital which is worn out and needs to be physically replaced, whilst the other 90% continues to function, and its replacement value continues to be accumulated in money hoards.

The fact that the assumption is false, however, does not change the basis of the argument. It simply means that in any single year, a greater proportion of Department 1 output can be allocated to the production of circulating rather than fixed capital. The real issue here, as I will set out later, arises with the consequences of the synchronisation of this replacement cycle.

The above explanation, however, seems to breach the requirement for simple reproduction, because the use of money hoards to cover replacement of fixed capital, to cover the purchase of additional material, implies expanded reproduction. If additional cotton were bought, this implies additional labour-power also has to be bought to process it. Marx's assumption that half the capitalists renew their fixed capital each year is a way around this. It means that a given amount of fixed capital (half the total) is replaced each year, so that each year, half of the Department 2 capitalists are responsible for buying the society's total production of fixed capital. In doing so, they provide the funds for Department 1 to buy Department 2 consumer goods. Within this process, the additional funds advanced by half the Department 2 capitalists, for this replacement fixed capital, flow back, but not necessarily to those that advanced it.

“One section of II has, besides the part of the means of production covered in the long run by its commodities, converted £200 in money into new elements of fixed capital in kind.” (p 464)

The fact that the assumption that fixed capital lasts only two years cannot be sustained, does not undermine this argument. It is merely a question of proportion as stated earlier. If the total output value of fixed capital, to be exchanged with Department 2, is £200 it does not really matter, in this context, whether this amounts to the physical replacement of half of a Department 2 total stock of £400, or a 10% replacement of a total Department 2 stock of £2,000. The point is that Department 2 capitalists spend £200 per year to purchase this total output of £200. Where it does matter, however, is in relation to the synchronisation of replacement cycles, and in relation to what orthodox economics calls the “accelerator” effect. I will deal with this later.

The logical flaw in Marx argument above, however, is that it is clearly not possible for “half of the £400 thrown into circulation by capitalist class II for exchange with I (to) come(s) from those capitalists of II who have to renew not only by means of their commodities their means of production pertaining to the circulating capital, but also, by means of their money, their fixed capital in kind, while the other half of capitalists II replaces in kind with its money only the circulating portion of its constant capital, but does not renew in kind its fixed capital...”

Logically, we have to assume that each section of Department II spends the same on circulating capital in any one year. Both have to buy the same amount of labour-power, and the same amount of material to process to ensure that production continues at the same level, and that this meets the requirement of simple reproduction. But, if both sections spend the same on circulating capital, whilst one section additionally buys replacement fixed capital, the total £400 to be made up of half from each section. The latter must clearly provide a greater proportion of the £400.

Monday, 29 December 2014

Greek Vote Signals Return Of Euro Crisis

The Greek Parliament has failed to elect a President proposed by the government, which means that parliamentary elections will be held in the next few weeks. All opinion polls suggest that those elections will be won by the left social-democrats of Syriza.

Syriza's economic plan is politically astute. It places the responsibility for resolving the crisis on Eurozone institutions, rather than on institutions such as the IMF. By implication, it says, that the Greek debt crisis, as with the whole Eurozone debt crisis, flows from the inadequate economic and political structure of the EU itself, and that the real solution, therefore, requires a resolution of that political crisis in the EU, not on further bail-outs provided by international finance. In that they are right. The Eurozone debt crisis, is the result of a political crisis in Europe, as I have set out many times in the past, and as I have set out in my book – Marx and Engels Theories of Crisis:  Understanding The Coming Storm.

That political crisis exists on two related levels. The first, superficial, level is that the political superstructure of the EU, is inadequate and incomplete. The political superstructure of the state has to fulfil a number of functions for any capitalist economy. As Marx puts it, the role of any state is to act as the executive committee of the ruling class. Modern capitalism is comprised of a global ruling capitalist class, but, as is the nature of all reality, this class is not some uniform homogeneous mass, but comprised of multifarious, and often contradictory components. At times, this global class has unified interests, but most of the time, different sections of this class have conflicting, contradictory interests. Over time, the coalition and coalescence of those interests changes, as the material basis of property relations changes.

The growth of productive forces, which required an ever larger market, created the requirement, initially, for the development of the nation state, and the further development of those forces, meant that even the nation state became a fetter on the further development of capitalism, requiring the establishment of larger political structures, like the EU. But, for the EU, as a political structure, to perform that function of executive committee of the European capitalist class, it must have all of the power that a single, centralised, capitalist state enjoys. It must be able to determine, and to enforce all of the laws that operate within the geographical confines of its remit. Only on that basis can it fulfil the other role that Marx says capital requires from its state – to create a level playing field in which each individual capital competes. Currently, the EU does not have such a state, and the EU proto state, exists in continual conflict with the individual nation states, that continue to reflect the conservative interests of the smaller, more backward segments of capital, and which act as a fetter on the further development of capital.

The second level on which this political crisis exists is that the reason that this inadequate political structure persists is the failure of social democracy to exert its dominance, and to establish such a state against the resistance of conservative forces. In the US, when such a situation existed, it led to the US Civil War, during which the forces of northern, big industrial capital, joined with the forces of the northern industrial working-class, to destroy the forces of conservatism, based on more primitive property relations, which sought to defend the independence and power of the individual states. The victory of the former established the power of the federal, social democratic state, over the power of the individual states.

Repeated European wars in the 19th and 20th century attempted to bring about a similar solution, but the power of British Imperialism, supported by US Imperialism, in the 20th century, prevented such a solution. The EU was intended, by social-democracy, after WWII, to bring about such a solution peacefully, but, particularly after social democracy was weakened, as big industrial capital was weakened, in the 1980's and 90's, it has failed to push forward that agenda. On the contrary, rather than engage in the kind of open political conflict with the forces of conservatism and reaction, that is necessary, it relied instead on a bureaucratic, statist solution, that created the kind of democratic deficit within European political institutions, that only leave it open to criticism, and create weakness. What Syriza is doing, is actually issuing a rallying cry to the forces of social democracy to reverse that trend. As Paul Mason puts it,

“So even as the symbolism of moderate Marxism is plastered all over Syriza, in reality its programme for Greece is mainstream Keynesian economics.”

That is of course, the same Keynesian economics that the social democratic state in the US has been pursuing for the last 5 years, in contrast to the austerian economic policies pursued by the forces of conservatism in the UK and Europe, that has brought stagnation. What Syriza represents is a political reflection of the material conditions existing within Europe, which have driven towards a crisis which must resolve this contradiction, one way or the other. It is the other side of the coin to the other political reflection of that contradiction, the growth of more extreme, reactionary nationalistic forces such as UKIP, the FN, AFD and so on. It is a political reflection of the fact that those material conditions have driven the contradiction to the point whereby the fudge that has existed for the last 25 years can continue no longer. Either big industrial capital, joins with the European industrial working-class to openly confront the forces of reaction, and push forward to the creation of a modern federal, European social-democratic state, similar to the USA, or else the forces of conservatism and reaction will triumph, and the existing EU will be broken apart. It will no longer be a question of whether Scotland, should be separate from the UK, Catalunya from Spain, and so on, but whether the EU as a whole, will become balkanised, blown apart into small, competing, reactionary states, driven backwards economically and politically, and as with the Balkans at the start of the last century, the playthings of much bigger, more powerful states.

Syriza, as Paul Mason sets out, is not calling for any bail-out by private capital, or by the IMF. It is calling for half of its €319 billion of debt to be written off by the EU, and after that for the ECB to buy all future Greek debt at zero interest rates for the next 60 years. This is being presented by the forces of conservatism as utopian, and a near revolutionary proposal that must lead to chaos, and a Greek exit from the EU. In fact, as Paul describes, it is no such thing. The reality is that, every economist knows that Greece's debt will have to be written off one way or another. The question is under what conditions that happens, and as part of what kind of structure to move forward, to remove the conditions which led to the crisis in the first place.

One of the reasons for the debt crisis is that the absence of a single federal state, with the attendant single fiscal as well as monetary union, itself creates contradictions that meant that the EU periphery got most of the downside of monetary union, without any of the upside. The Euro's value was high because it was based on the strength of the German economy. But, the high value of the Euro was a constraint on foreign capital investing in the European periphery, a fundamental requirement if those economies were to be modernised, and achieve a level of global competitiveness. The high value of the Euro meant that exports from those economies were expensive, whereas their imports were cheap – a similar problem to that faced by Russia and other petro-dollar economies. That also encouraged, a build up of debt, especially in conditions of low interest rates.

As described previously, a single European state, with a single fiscal policy, would have meant that the value of the Euro would have been based more on the competitiveness of the EU as a whole, not just on the strength of Germany; it would have reflected the borrowing needs and credit worthiness of the whole EU, behind which the EU state would have to stand. Similarly, such a single fiscal policy, with a single Debt Management Office, issuing Eurobonds, to cover the deficit of the whole EU economy, would have reflected the overall condition of the EU economy, and would simultaneously have meant that each economy was able to borrow at the same costs, rather than as at the moment, Greece facing yields on its 10 year bonds of 9%, whilst Germany faces yields of only 0.5%!

The establishment of such a single social-democratic state would have meant that other unified conditions would have to exist within its borders. There would have to be the same pension age, the same entitlements to pensions and benefits across the whole economy, which in itself would be a powerful stimulus to economic growth by facilitating the free movement of labour, whilst simultaneously undermining the siren calls of reaction. Once all such payments are made from a single European budget, there can be no more nonsense spoken about immigrants moving only to obtain benefits, or even nonsense about the need to contribute to benefits for given lengths of time before being entitled to draw from them. Such suggestions would be no more logical than to argue that someone moving from Lancashire to Yorkshire, should not be entitled to use services there until they had lived there, and paid Council Tax for some minimum amount of time!

Readers of this blog for some time, will know that I do not believe that any of these social-democratic solutions are adequate. In fact, in some ways, but only in some ways, they detract from an adequate socialist solution. Had workers continued to develop their own co-operative production, their own Friendly Societies, which provided them with social insurance under their own direct control, and which would have required that their funds be used to finance the development of their own co-operative production, or to buy an increasing share of socialised capital, as Marx had thought would be a natural progression, this would have provided them with a much better long-term solution than reliance on the capitalist welfare state. It would, necessarily have meant that such co-operative production would be developed by workers across borders, undermining nationalistic sentiments, as well as creating such international social insurance.

But, we have to deal with reality as it exists not how we want it to have developed. On that basis, social-democracy represents a more mature form of capitalism, and its on that basis that Marxists defend it against conservatism. It is hilarious to watch the political representatives of conservatism like George Osborne, or its media representatives, such as those that present programmes on the US business channels, as they try to deal with the contradiction they face from capitalist development. Out of one side of their mouth, they continually decry the inevitable failings of socialist planning, out of the other side of their mouth, faced with the reality that modern capitalism itself could not have survived without such planning, they simultaneously attest to the omnipotence of central planners based in the central banks to unilaterally determine interest rates!

However, it is equally hilarious, but more frustrating to watch the representatives of social democracy as they try to deal with the contradictions of that development. On the one hand they fear the forces of conservatism that threatens to turn the clock backwards, but they are repeatedly unable to counter those forces by an outright assault, because to do so leads them to look forward to their own defeat, at the hands of the forces of the working-class they rely on as foot soldiers to defeat their conservative enemies. The task of Marxists, under such conditions, is to act like commanders in a battle, and to prevent any wavering on their part in that movement. The events in Greece, and the growing power of the forces of social-democracy in Europe, makes that task easier.

Labour's Immigration Policy Is A Mess - Part 3

The history of the Aliens Bill, discussed in Part 1, is significant for another reason. The argument is often put that the problem of racist and other bigoted ideas can be addressed by dealing with the underlying causes of fear amongst workers that leads them to accept those ideas as solutions to their problems. Its undoubtedly true that policies that deal with those underlying causes of fear is a necessary part of that struggle. But, its facile, and to have a totally unrealistic conception of the working-class, and more particularly of its more backward segments, to think that this is in any way sufficient.

Although, 1905 coincided with a period of higher than usual unemployment, itself a sign of Britain's flagging economic power in the world, as new economies like the US, Germany and Japan were beginning to rise, it came in a period of long wave economic boom. From the early 1890's, up to 1914, there was a powerful global expansion, which itself was the material basis for the development of strong labour movements, the growth of trades unions, and the establishment of huge workers parties, of which the Labour Party was only one.

The same is true of the 1950's and 60's. A similar long wave boom ran from 1949 to 1974. It saw the growth of strong trades union movements in the 1950's and 60's, including the growth of powerful rank and file movements, like the Shop Stewards movement in Britain. It saw that translated into a renewing of the workers political organisations, which had been decimated during the 1930's and 40's.

In Britain, the economic growth was such that labour shortages meant that not only did capital seek to bring married women into the workforce, but the Tory Governments of the time sent out to the Caribbean and other parts of the Empire to encourage immigration to Britain. It was a time when huge amounts of money was being spent on developing the NHS and Welfare State, when large quantities of council houses were being built, and when vast swathes of Victorian slum housing was being cleared and replaced by modern houses, and flats. That is not to say that any of this was adequate, there were still large numbers living in poor conditions, and the top down statist methods used to carry out all of this modernisation was bureaucratic, but unlike today, it could hardly be said that there was not large scale public investment taking place.

Yet, despite all of that, there was no shortage of racist and bigoted views across all sections of society, including the working-class. Nor was it just the backward, unorganised sections of workers where that was the case. It was, for example, some of the most militant workers, the London dockers, who marched in support of Enoch Powell.

On 23rd April 1968, 1,000 London dockers went on strike in protest at Powell's sacking, by Ted Heath, over Powell's infamous “Rivers of Blood” speech. The dockers marched from the East End to Parliament, with placards saying "Don't knock Enoch" and "Back Britain, not Black Britain". To their credit Labour MP's Peter Shore and Ian Mikardo, who represented London seats where many of these dockers came from, stood up to the reactionary sentiments.

Mikardo's own parents were Jewish emigrants escaping Tsarist anti-semitisim. Shore and Mikardo were shouted down and some dockers kicked Mikardo. The organiser of the strike, Harry Pearman, headed a delegation to meet Powell and said after: "I have just met Enoch Powell and it made me feel proud to be an Englishman. He told me that he felt that if this matter was swept under the rug he would lift the rug and do the same again. We are representatives of the working man. We are not racialists."

The same kind of approach is taken today by UKIP. In January, Nigel Farage stated that 'the basic principle' of the speech was 'right'. (Quoted in Daily Telegraph 7th January 2014). We have the former Tory MP, and now UKIP MP, Mark Reckless, mirroring the kind of sentiments previously espoused by the National Front in relation to deportation. In a speech in the by-election campaign, Reckless proposed that EU citizens living in Britain would be asked to leave by a UKIP government, if Britain left the EU. We then have the surreal picture of Reckless and Farage, as former bankers and stock market traders, right-wing Tories, putting themselves forward as defenders of the interests of ordinary working people! 

On 24 April 1968, 600 dockers at St Katharine's Docks voted to strike and numerous smaller factories across the country followed; 600 Smithfield meat porters struck and marched to Parliament where they handed Powell a 92-page petition supporting him. By 27 April, 4,500 dockers were on strike.

Sunday, 28 December 2014

Capital II, Chapter 20 - Part 39

The analysis set out by Marx here presages that of Keynes by around 60 years. The points that Marx is examining here, as discussed in Part 38, cover the aspects of forced savings, which appear as investment in the form of inventories, in Keynes' theory, as well as the concept of underconsumption, due to changes in, or in Marx's case, differences in the marginal propensity to consume of different social classes; a point Marx specifically refers to in explaining the basis of crises in Capital III, Chapter 15.

Marx's analysis here also gives the lie to the idea that Marx rejected the potential of crisis arising from such underconsumption. The analysis here is based upon simple reproduction, and constant technology. In other words, any crisis that arises here cannot be attributed to a reduction in investment due to a falling rate of profit, caused by changes in the organic composition of capital. The disproportion here between Department I and Department II arises, not because of any change in values, technology or output. It arises, because fixed capital passes on its value in wear and tear to the value of Department II output, but this value of wear and tear, realised by Department II, is not then returned to Department I, in the purchase of fixed capital. In essence, as Marx says directly later, this amounts to an underconsumption of constant capital by Department II, even though there has been no actual change in its production and consumption.

The further elaboration here shows how this is resolved in theory, so that no disproportion, in fact arises. However, Marx in the previous quote, and in his later elaboration makes clear that although the removal of any “ obscuring minor circumstances” is necessary, in order to obtain a clear theoretical understanding of the real relations, in practice, these circumstances take on a very real role. In practice, the replacement of fixed capital does not occur mechanically and smoothly, as the theoretical explanation requires. Any lengthening of the life of existing fixed capital, will cause the kind of underconsumption by Department II, described here, to arise, just as any shortening of its life will cause the opposite. Marx examines those situations later in the chapter.

But, Marx's reference to the role of the other exploiting classes has a similar consequence in practice as he described in Capital III, Chapter 15. The industrial capitalists, may utilise any potential money-capital, not used for personal consumption, for productive investment, so that aggregate demand is sustained, by them, as either consumption or investment. The workers will use all of their wages to finance their consumption. But, landlords after utilising rents, obtained from capitalists, to finance their personal consumption, have no drive to invest the remainder productively, as the industrial capitalists do. To the extent that they simply save this remainder, they underconsume. This remainder gets thrown into the money market, and thereby acts to reduce interest rates. Marx in Capital III, sets out the way that one determinant of lower interest rates is the maturity of an economy, such that older societies, with a larger group of people with wealth, who do not participate in productive investment, thereby tend to produce a surfeit of potential loanable money-capital, which causes interest rates to be low.

£1,000 is advanced as variable capital by Department 1. The £1,000 received as wages by Department 1 workers is spent by them. This money does not flow directly to Department 2 capitalists. The workers buy goods from shops, they pay rent to landlords, bills to doctors, taxes to the state and so on. The recipients of these payments may then in turn spend the money they receive in a similar manner. Only after a multitude of such transactions, and a very circuitous route, does the money eventually find its way into the coffers of the Department 2 capitalists, who provide the required consumption goods.

The longer the process takes, and the longer then before the money is used by Department 2, to purchase additional means of production, the more capital may have to be advanced to ensure that production is continuous.

It doesn't matter whether we assume that it is Department 1 capitalists who firsts spend money to buy Department 2 consumer goods, or whether it is Department 2 capitalists who first advance capital to buy Department 1 means of production. In reality, both will happen. Some Department 1 capitalists – for example, those that have just set up in business – will lay out money to buy consumer goods before they have sold means of production. Similarly, some Department 2 capitalists will advance capital for means of production before they have sold consumer goods.

“This assumption must be made, for it would be arbitrary to presuppose the contrary, that capitalist class I or II should one-sidedly advance to the circulation of the money necessary for the exchange of their commodities.” (p 462)

In either case, the money spent or advanced, returns to its origin. Money spent by Department 1 capitalists, to buy consumer goods, returns to them in the form of realised surplus value. Money advanced by Department 2 capitalists, to buy means of production, returns to them in the realised value of that constant capital in the end product.

The problem we have is that Department 2 has sold £2,000 of consumer goods to Department 1. Part of this £2,000 value is made up of £200 for wear and tear of fixed capital. Because this fixed capital is only replaced when it is worn out, the £200 is retained as a money fund to be spent later. But, that means Department 2 now only buys £1,800 of constant capital from Department 1, leaving it with £200 of unsold commodities.

Saturday, 27 December 2014

Oil Prices. Good For The Economy, Terrible For Financial Markets - Part 3

As Marx sets out in Capital III, in looking at the way interest arises as a deduction from surplus value, even where a productive-capitalist uses their own money-capital, rather than borrowing loanable money-capital, they come to see the interest as something different from the profit derived from productive activity. Interest is seen as some inherent quality belonging to capital, whereas profit is increasingly seen as merely a specific form of wages paid to the entrepreneur for engaging in such activity. That is particularly the case, Marx says, where professional managers take the place of individual private capitalists.

If £1 million of money-capital is borrowed by an entrepreneur, to buy productive-capital, and the rate of interest is 10%, the entrepreneur, the productive-capitalist, will expect to pay £100,000 in interest for its use. (This is true whether the loan is in the form of a bank loan, a bond, or the issue of shares to shareholders, although in the last case, the manager may decide to defer the payment of dividends, for so long as shareholders will allow it) But, by the same token, a productive-capitalist who uses £1 million of their own money-capital, will make the same calculation. They will see £100,000 of their profit as arising not from their productive-activity, but simply as £100,000 of interest on the capital they have loaned to the business. This is no different to the situation of the capitalist farmer who owns the land they farm, and thereby pays to themselves the rent that otherwise would have gone to the landlord.

But, however much the productive-capitalists, in these situations, see themselves as in no different a situation to that of the productive-capitalist who relies on borrowing loanable money-capital, it is quite clear that, in practice, they are in a different situation. When surplus profits, which are the basis of rent, disappear, the landlord will still expect to be paid rent, even if this means the productive capitalist makes losses rather than profits. When the profit of the productive-capitalist falls or disappears, the money-capitalist will still expect to be paid the interest on the loan, as well as to have their capital sum repaid to them. The productive-capitalist who owns the land they work, can simply defer the rent they would have paid to themselves, and the productive-capitalist, who sets up in businesses using their own money-capital, can likewise defer the interest they would have paid to themselves. This is why small peasants or share-croppers, who own the land they work, or small private capitalists, can continue, for a long time, making little or no profits, and even eating into their own wages, and the wages of their workers.

The rent that must be paid to the landlord, or the interest to the money-capitalist, is not the equivalent of an amount of value provided by the owners of those commodities, a value, which would then contribute to the value of the end product. Land is not the product of labour, and so has no value. Loanable money-capital is not really capital, but only fictitious capital. What the money-capitalist sells as a commodity, is the use value of capital as self-expanding value. So, neither the rent nor the interest are the equivalents of additional value acquired by the productive-capitalist. As Marx points out, they are then just costs that must be incurred, and a deduction from their surplus value.

“Of course the land and capital borrowed by the industrial capitalists from the idle capitalists and for which they have to pay a portion of their surplus-value in the form of ground-rent, interest, etc., are profitable for them, for this constitutes one of the conditions of production of commodities in general and of that portion of the product which constitutes surplus-product or in which surplus-value is represented. This profit accrues from the use of the borrowed land and capital, not from the price paid for them. This price rather constitutes a deduction from it. Otherwise one would have to contend that the industrial capitalists would not get richer but poorer, if they were able to keep the other half of their surplus-value for themselves instead of having to give it away. This is the confusion which results from mixing up such phenomena of circulation as a reflux of money with the distribution of the product, which is merely promoted by these phenomena of circulation.”

(Capital II, Chapter 20, p 490)

Where a business has been established on the basis of borrowed capital, the lender will want to be paid their interest, and to ensure that their principal sum is repaid to them. A small oil company that has borrowed money to invest in exploration, and the development of wells in deep sea oil production, can only make its interest payments, and the repayments of principal, if oil prices are high enough to cover them from its profits. If the profits are not sufficient, the company must, sooner or later, become insolvent, because, after making those payments, to the bank or bond holders, it does not have sufficient circulating capital, to cover the payment of wages, and for the purchase of auxiliary materials, to cover the costs of maintenance and repair and so on.

The bank or bondholders, under those conditions, will seek to foreclose on the loan, and rescue as much of the situation as it can. It will seek to sell off the business, and its capital, to some other buyer, so as at least to obtain the return of its principal. But, under conditions where a number of such liquidations are occurring, and where the potential for making profits, from such capital, have been significantly reduced, as the price of oil has fallen, the money-capitalist will be forced to sell at prices often well below the original value of the capital. In fact, much of the capital-value will be irretrievable. The fixed capital itself may have some residual value, but the capital sunk into the costs of exploration, or the sinking of test wells, does not reside in any physical form. It has been completely sunk.

This is a similar situation to a bank that has loaned money for the purchase of a house. The house buyer may also have borrowed money to cover the installation of luxury fixtures and fittings, but in the event of forced sales, where an increasing number of borrowers are forced to sell, they have no possibility of recovering the value of either the house or the fixtures and fittings, and the bank will also have lost most of the money it loaned for their purchase. It is usually the case that the market price of such properties is even lower than the current cost of building an equivalent house. That is because the seller is forced to sell at whatever price they can obtain, whereas the builder of an equivalent house is not, in the same way, forced to build at such a reduced price. It is only when the effect of these forced sales, across the market, begins to take hold, and causes non-forced sellers to reduce their prices so as to compete, when others, seeing prices falling rapidly, decide to sell before they become forced sellers themselves, and so on, that market prices, in general, begin to crash, and have a consequent effect on land prices, and the prices of new production.

Very large oil companies – and the same applies for other primary produces – are, ironically, in a similar position to the individual private capitalist, in the sense that they can often finance their purchase of fixed capital, and their exploration costs from internally generated funds. To the extent they borrow, it is often on the back of their huge balance sheet, which enables them to issue bonds at very low interest rates, at the most advantageous times, including to use that borrowing to pay off older, more expensive loans, or to buy back shares.

This difference between those capitals that are dependent on borrowed money-capital, and those that operate on the basis of their own capital, is significant, under conditions where profits are falling and capital is being liquidated. In turn, this effect has consequences for future values, profits and the rate of profit, which I will look at next.

Northern Soul Classics - I Got A Feeling - Barbara Randolph

More Motown magic.  Classic soulful, dancer from Barbara Randolph.

Friday, 26 December 2014

Capital II, Chapter 20 - Part 38

Marx then examines a number of formulations of the problem.

“Expressed in terms of value, 2,000 II c equals 1,800 c + 200 c (d), this d standing for déchet.” (p 459) (déchet means wear and tear).

If we divide Department II's output up physically into those portions that represent c+v+s then we can consider the exchanges as being the purchase of commodities out of, or exchange with, these different portions. So, Department I(v+s) exchanges with II(c) or put another way, workers and capitalists from Department I buy goods out of that portion of Department II's output equal to the value of c, a proportion of its total output value equal to two-thirds, or £2,000.


“I buys with £1,000, which has gone to the labourers in wages for their labour-power, 1,000 II c of articles of consumption.” (p 459)

Similarly, with the £1,000 received, Department II buys £1,000 of means of production, which can be thought of as coming out of the corresponding proportion of Department I's output, which equals v, i.e. a sixth of its total output value, or £1,000. By this process, the £1,000 that Department I capitalists advanced as variable capital is returned to them, and can be used to buy labour-power once more.

Department II then advances £400 to buy means of production out of I (s), and Department I capitalists use this £400 to buy consumer goods out of II (c), so Department II has received back the £400 it advanced. Department I capitalists then buy another £400 of consumer goods out of II (c) and Department II capitalists buy £400 of means of production out of I (s).

To summarise:-

Department I, buys £1,800 of consumer goods using the following means.

Means of production
Money (s)
Department II, buys £1,800 of constant capital using the following means

Consumer Goods (sold to Department 1 workers)
Consumer Goods (sold to Department 1 capitalists)

At the end, Department I has the £1,000 in money capital available to replace its variable capital. Its capitalists have £800 of consumer goods for which they exchanged £400 in means of production and £400 in money. They also have £400 in money.

Department II has £1,800 in means of production obtained from Department I, by exchanging £1,000 consumer goods (for wages) £400 (consumer goods), and £400 in money.

However, out of the total output, Department I still has £200 of means of production, and Department II has £200 of consumer goods, (equal to 200 c (d)) unsold.

Department I capitalists buy those £200 of consumer goods, but Department II capitalists do not spend it to buy means of production, instead hoarding it to replace fixed capital, some time later. As a result, a fifth of Department I's surplus value cannot be realised. 

“This not only contradicts our assumption of reproduction on a simple scale; it is by itself not a hypothesis which would explain the transformation of 200 c(d) into money. It means rather that it cannot be explained.” (p 460)

We would have to assume that Department I capitalists exchanged this remaining £200 of means of production gratis, but, of course, that is not a likely course for capital to take, especially considering that this would have to occur year after year. Marx equates the situation to that which applies to all those parasitic classes that also share in the surplus value. If, for whatever reason, they do not spend their share of the loot, then it does not go back into circulation, does not go back into the pocket of the capitalists, and thereby ceases to be available to be paid again as rent, interest and so on.

The problem is not resolved by drawing in the role of the merchant as intermediary. Department I must sell £200 of means of production out of I(s) to Department II capitalists to match the £200 of consumer goods it has bought. Otherwise, Department I surplus value is not fully realised. If Department I sells this £200 to merchants, the merchants still have to sell it to Department II capitalists.

“We see here that, aside from our real purpose, it is absolutely necessary to view the process of reproduction in its basic form — in which obscuring minor circumstances have been eliminated — in order to get rid of the false subterfuges which furnish the semblance of “scientific” analysis when the process of social reproduction is immediately made the subject of the analysis in its complicated concrete form.” (p 461)

Thursday, 25 December 2014

Fictitious Capital - Part 4

But, despite this reality, described in Parts 1-3, the development of interest-bearing capital, creates the conditions for an enormous expansion of this fictitious capital. As described above, a bank, A, for example, which loans £10,000 to productive-capitalist B, to buy a machine, appears to create £20,000 of capital, even though only £10,000 of real capital exists in the shape of the machine. The other £10,000 exists as fictitious capital in the shape of a loan certificate owned by the bank. This certificate now forms part of the bank's capital. All loans appear as assets of the bank, whilst all deposits with it form liabilities.

The bank can use the loan certificate as capital against which it can make further loans, provided it has adequate liquidity. Alternatively, the bank can use the loan certificate as collateral in order to borrow money itself. A bank can, for example, borrow money from the central bank, and give the central bank such a loan certificate as collateral for this loan. The bank can then use the money so obtained to make further loans to its customers. Often the means for doing this is that banks use bonds in their possession as collateral. Such bonds are no different in essence than such a loan certificate. A bond is simply a legal document issued by the borrower, which sets out the amount borrowed, the duration of the loan, and the amount of interest to be paid. When central banks have engaged in Quantitative Easing, what they have done is to buy such bonds from banks, and thereby to provide the banks with newly created money tokens.

But, each new loan here appears as yet another piece of capital, because each attracts interest. Each appears to be self-expanding value. If the bank has found from experience that it only every needs to retain 10% of deposits as cash to meet the needs of its customers, then it can loan the remaining 90%. So, here, if the bank starts out by loaning £10,000 to B, who uses it to buy a lathe, this loan appears as £10,000 of bank capital, against which the bank can then make additional loans. So, on this basis, it may make a further loan of £9,000, to C, which then also appears as additional bank capital. The bank can then make an additional loan of £8,100 to D, which then appears as additional bank capital making possible a loan to E and so on. Instead, of just issuing a loan of £10,000, this initial bank capital of £10,000 enables the bank to issue loans of up to £100,000, and each of these appear on its books as capital, whilst in fact this £100,000 is only fictitious capital, it is only able to earn interest to the extent that the money loaned out is used to buy productive-capital, and thereby generate surplus value.

This, of course, is all well and good, provided the loaned money-capital is used for such productive purposes, and does indeed result in the creation of surplus value, out of which the required interest is paid. But, there is no such guarantee that even where the money is used for such purposes that profits will be made, and that interest can then be paid. That is why banks are cautious about lending money to small businesses, which frequently are unable to make profits, and almost as frequently go out of business. When a business to which such a loan has been made goes bust the truly fictitious nature of the capital in the possession of the bank becomes apparent. Not only is it unable to obtain the interest on the loan, but frequently, the actual productive-capital that was bought with the loan, becomes seriously devalued, so that when sold it does not even raise enough to cover the original capital sum borrowed. Instead of it being self-expanding value, it has become diminished value.

Even more is this the case where the loan is made for purposes that have nothing to do with the production of surplus value. The owner of loanable money-capital, is not interested what purpose the borrower has for the money they borrow, any more than the seller of electric toothbrushes has any interest what purpose the buyer has for them. All they are interested in is obtaining payment for the commodity they sell. As set out above, interest is merely the price for the sale of capital as a commodity, for its use value as self-expanding value.

If the borrower, the buyer of that commodity, does not use it for that purpose, it is of no concern to the lender, the seller of the commodity. They will still be expected to pay its price, i.e. to pay interest to the lender. If the borrower uses the money-capital they borrow, for other than productive purposes, they will then have to find other means of paying this interest. Take, for example, the government. The government borrows money by issuing bonds. The bonds are bought by rich individuals, banks and finance houses, large companies, and by other states. These bonds appear as capital to those who have bought them.

However, from what has been set out above, its clear that these bonds are only fictitious capital. They are nothing more than a loan, and only able to produce interest to the extent that those who have borrowed against them use the proceeds for productive purposes, as capital, to produce surplus value. But, a government that borrows by issuing such bonds does not generally use the proceeds as capital, as self-expanding value, i.e. to engage in productive activity, and generate surplus value. Money raised by such borrowing, merely to cover the government's own running costs, does not act as capital, but only as revenue, i.e. it is only a money equivalent of that portion of society's consumption fund, drawn upon by the government to meet its needs. The same applies where it is used to cover various welfare functions.

Wednesday, 24 December 2014

A Tale Of Two Policies

This week has seen the release of two sets of data that illustrate the division between the kind of Keynesian policy of fiscal expansion undertaken in the US, and the policy of Austerian contraction adopted in the UK, and inflicted on the EU periphery, which I discussed some time ago. On the one hand, the US economy's growth has been revised up significantly from previous readings, showing 5% growth for the 3rd quarter. On the other, UK growth has been significantly revised down from 3%, to just 2.6%.

The Liberal-Tories, for the last five years, have relied on telling lies about the condition of the UK economy. Ahead of the 2010 General Election, the Tories declared that the UK economy was in as bad a condition as Greece. That statement was ridiculously untrue, but it justified the Tories adoption of a policy of Austerianism, as a means of politically differentiating themselves from Labour, and of appealing to their small capitalist base. The Liberals, only after they had got the whiff of leather, from Ministerial limousines, adopted the same set of lies, to justify their collaboration with the Tories.

Having adopted this narrative, they became locked into it, in relation to the policy they were then forced to adopt. They no doubt believed that the economy would recover faster, so that many of their policies would never have to be implemented. They focussed a large part of their early cuts programme on Local Government, so as to be able to blame “profligate” Labour Councils, and avoid too much criticism themselves. The total package of cuts was back-loaded, so that, for example, the cuts in Child Tax Credits, which affect the better off voters, more likely to vote Tory, were only to be implemented to the back end of their programme. They no doubt expected never to have to introduce that part of their programme, and to thereby declare the success of their policies.

But, just the ridiculous catastrophist rhetoric that the Liberal-Tories came out with, in 2010, was enough to send the economy into a serious tailspin. When Osborne introduced his Austerian budget later in the year, it sent the economy into a recession, that was to last essentially for 3 years, reversing the sharp expansion of the economy it had been experiencing after 2009. The major lie that the Liberal-Tories have had to tell, therefore, has been that the UK economy was in a dire state in 2010, and getting worse, rather than that the economy was recovering strongly after 2009, and it was the Liberal-Tory policies which sent it into recession.

In fact, as the graph shows, UK GDP was higher in nearly every quarter between 2005, and the financial crisis of 2008, than the Liberal-Tories have managed after 2010. Moreover, far from the economy being in contraction prior to the election, as the Liberal-Tories have claimed, it was growing, at around 2%. And, given the fact that the Liberal-Tories could hardly claim any credit for what happened to the economy for most of 2010 (other than that their catastrophic pronouncements acted to depress rather than stimulate economic activity!) the continued growth of more than 2%, for the rest of the year, would reasonably have to be credited to the stimulative policies, previously introduced by Labour. It is after that period, when the economy noticeably begins to slow down under the impact of Liberal-Tory economic policy.

The line graph of the period, showing the strong “V” shaped recovery under Labour, and the decline under the Liberal-Tories, shows that even more clearly. Only in the last four quarters, has growth returned to the kind of level that it was at prior to the election, and, as set out previously, the basis of that has not been the kind of restructuring towards industrial production that the Liberal-Tories promised, but has been based on yet another, quick fix monetary stimulus to existing asset bubbles, and a reliance on freak phenomenon such as the stimulus provided from PPI compensation payments. But, as set out in that previous post, the UK economy is now turning down sharply, as that fig leaf of growth is exposed, and the chickens once more come home to roost, on Liberal-Tory short-termism and gimmickry. The revision of UK growth figures from 3% to just 2.6% represent a huge reduction, of around 12% of the original figure, and the trajectory is sharply downwards from here.

The other lie that the Liberal-Tories have relied on, is that the 2008 financial crisis was somehow the result of Labour profligacy in public spending. Yet, on average, the UK deficit to GDP ratio was lower between 1997-2008, under Blair and Brown, than it was under the arch Austerians Thatcher and Major, and significantly so. This is shown in the next chart. In 1995, under Major's government, the budget deficit was more than 5% of GDP. Under Blair's government, not only did the deficit to GDP figure shrink, but in 2000, it went into surplus. In 2001, Blair's government ran a budget surplus of around 3% of GDP, and there was a surplus in the following year too. Even in the following years, from 2002 up to 2008, the deficit to GDP ratio was only around 2-3% of GDP, and significantly lower than the deficit to GDP ratio that has been run throughout the period of the Liberal-Tory government. The main reason for that is that under Labour, there was economic growth, and under the Liberal-Tories there has been economic contraction.

The other lie told by the Liberal-Tories is that this profligate spending by Labour had caused interest rates to rise, and it was only the sound money policies pursued by the Liberal-Tories that were saving the situation. But, the next chart shows that this is a lie too. The yield on the UK 10 Year Gilt was 5.5% in 2007, and was falling under Labour. At the low point of 2009, even as the government was forced to borrow on a large scale to deal with the financial crisis caused by the Tories friends in the banks and finance houses, it had fallen to 3%. Although, as the financial crisis unfolded, and that borrowing to deal with it rose, yields rose to 4%, by the start of 2010, under Labour, they were falling again, back down to 3%. In fact, it was after the Liberal-Tories were elected, that yields started to rise again, back up to 4%.

Its only when, the Bank of England came to the rescue of the Liberal-Tories, with a massive programme of QE, to buy UK gilts, that their price was pushed up, and the yield down, once more. The consequence of that policy, which was one of the causes of the financial crisis in the first place, was to once again inflate asset price bubbles in property, and shares, thereby preparing the ground for an even bigger crash than in 2008, when those bubbles burst.

Moreover, it has been under the Liberal-Tories, not under Labour, that the UK lost its Triple A credit rating; a direct consequence of economic contraction, resulting from a conscious political decision by the Liberal-Tory government. The role of QE by the Bank of England, was seen after it was ended, with Gilt yields rising back to 3% once more. It is only the influx of hot money from emerging markets, seeking relative safety, that has once more pushed yields down temporarily, before they once more shoot up, crashing asset prices, as that hot money rushes out again in search of higher yields, and currency gains.

Labour has said that the Liberal-Tory policies would cause “a lost decade”, and they are right. The difference between the policies adopted by the Liberal-Tories, and forced on Greece and other countries in the EU periphery, as against the policies adopted in the US, and that were being pursued previously by Labour, is stark. The US, and Labour in the UK, adopted a policy of Keynesian fiscal expansion after the financial crash of 2008. The sharp “V” shaped recovery they experienced is clear. But, after 2010, when the Liberal-Tories came to office, they announced that they would inflict austerity on the economy. A similar policy was adopted in the EU periphery. The consequence of that is shown in the divergent course of the US economy after that date with the situation in the UK and EU.

The US, took advantage of record low interest rates – as indeed did many large corporations – to borrow almost for free, to finance expansion, or to cancel more expensive, older debt. Large corporations, for example, borrowed large amounts at these low rates, in order to buy back shares. The US continued to grow strongly, whilst the UK and EU periphery went into contraction, which made their problems of repaying debt even worse. As a result, the UK failed by 50%, in the Liberal-Tories promise to eradicate the deficit by 2015, and ever harsher austerity was imposed on Greece, and other EU countries, sending their unemployment rates ever higher, and decimating the infrastructure of the country.

Its ironic that the Liberal-Tories talk about “repairing the roof when the sun is shining”, because they have done the exact opposite. When I was first elected as a County Councillor, back in 1997, one of the first speeches I made at the Full Council meeting was on precisely that point. After 18 years of Tory misrule, the fabric of society had not just been left to rot, but had been sold off to the highest bidder, asset stripped and vandalised. It would take several years, I said for Labour to repair all the damage that the Tories had inflicted on the fabric of society. Instead of repairing the roof of the fabric of society, the Liberal-Tories have simply resorted to their normal pattern of asset stripping whatever they can get their hands on, of allowing everything to fall into disrepair for the sake of short term, penny-pinching savings.

The US, despite the fact that it has faced sniping and attempts to undermine growth by the Liberal-Tories co-thinkers in the Republican Party, and Tea Party, was able by the use of Keynesian fiscal stimulus to create a solid enough base, that the economy has entered what seems to be a path of self-sustaining growth – at least until the next cyclical downturn arises. By contrast, the UK economy looks to be entering a further period of weakness that the Liberal-Tories policies of austerianism have made it ill-prepared to weather.

The UK economy has gone nowhere in the last 5 years as a result of those policies. It has sent millions of workers into zero hours, and other temporary and low paid jobs. Not only has it led to rising government debt, despite its promise to do the opposite, but it has sent millions of workers into much greater debt, in the hope of keep the ridiculous property bubble inflated, in the hope of saving the banks. Millions now rely on credit just to get to the end of the month, millions more are permanently dependent on the tender mercies of the Pay Day Loan sharks. It will take at least another 5 years, for Labour to once again remedy the mess that the Liberal-Tories have created. A lost decade that could have turned out much better without the pain the Liberal-Tories inflicted on the economy, and on the majority of the population.

Capital II, Chapter 20 - Part 37

1) Replacement of the Wear and Tear Portion of the Value in the Form of Money 

Considering then this exchange between I(v+s) and II(c), its clear that I (v+s) contains no constant capital. The value being exchanged from this side comprises only variable capital and surplus value. But, on the other side, the constant capital is only constant capital and part of it is a part of that value that is equivalent to wear and tear. That portion is not to be replaced immediately. It is to be hoarded as money, and only used to replace fixed capital when it is exhausted. This, of course, is happening all the time. The analysis is one of an existing capitalism in which firms have existed for varying periods of time, and along with them, that fixed capital, which itself is made up of a range of equipment with varying durability.

“Therefore the exchange of 2,000 II c for 2,000 I(v + s) includes a conversion of 2,000 II c from its commodity-form (articles of consumption) into natural elements which consist not only of raw and auxiliary materials but also of natural elements of fixed capital, such as machinery, tools, buildings, etc. The wear and tear, which must be replaced in money in the value of 2,000 II c, therefore by no means corresponds to the amount of the functioning fixed capital, since a portion of this must be replaced in kind every year. But this assumes that the money necessary for this replacement was accumulated in former years by the capitalists of class II. However that very condition holds good in the same measure for the current year as for the preceding ones.” (p 457) 

The reason for approaching things in this way becomes clear here because on the other side,

“In the exchange between I (1,000 v + 1,000 s) and 2,000 II c it must be first noted that the sum of values I(v + s) does not contain any constant element of value, hence also no element of value to replace wear and tear, i.e., value that has been transmitted from the fixed component of the constant capital to the commodities in whose bodily form v + s exist.” (p 458)

It is only in relation to II(c) that this exists, and hence the problem. The shortfall of £200, referred to earlier can only come from Department I, but that leads to absurd conclusions. Department II has commodities for sale whose value is £2,000. Department I workers and capitalists must pay £2,000 for them, if the condition that commodities exchange at their value is to hold. If Department II has only bought £1,800 of commodities from Department I, only Department I can make up the difference. However, unlike the money that Department I capitalists throw into circulation to cover their consumption, which is equal to their surplus value, this additional money would not return to them, because it is not equivalent to any component of the value of the commodities they sell to Department II.

“In such an event we would have a money-fund for II, placed to the credit of the wear and tear of its fixed capital. But then we would have an over-production of means of production in the amount of 200 on the other side, the side of I, and the basis of our scheme would be destroyed, namely reproduction on the same scale, where complete proportionality between the various systems of production is assumed. We would only have done away with one difficulty in order to create another one much worse.” (p 459)