Thursday, 7 August 2014

Capital II, Chapter 17 - Part 18

There is no mystery about how capital realises surplus value, where the capitalists themselves consume the surplus product in the form of either productive or unproductive consumption. We have seen already that the capitalists themselves throw into circulation the money, and money capital required, as the counterpart of the surplus product. The question here is, how can money hoards arise where not all of that surplus product is consumed by capitalists, and where workers wages can never be high enough to absorb it?

Returning to the question above, we can see how this relates to the 1980's. With the onset of the Long Wave Winter, around 1986-7, the rate of profit began to rise globally. A higher rate of profit, in conditions of relatively weak economic activity meant money hoards rose, as the demand for money-capital fell relative to its supply. This caused global interest rates to enter a secular down trend that persisted until around 2013. However, the accumulation of an increasing money hoard assumes that the surplus value itself can be realised. For such money hoards to rise, capital must be able to sell without buying.

Marx provides the answer to this question later by using a thought experiment.  The basis of the answer is to remember that money is the universal equivalent form of value, and as gold it assumes the form of a money-commodity.  It is then possible for commodity producers to exchange all of their commodities, which contain the surplus value, with the producers of this money-commodity, whose output also includes the surplus value.  Having exchanged their commodities for gold, therefore, all that is required is for them not to use all this gold,to buy commodities for productive or unproductive consumption.

But returning to the question relating to the 1980's, the question was also how was it possible to realise the surplus value, in conditions where wages themselves were stagnant or falling.  The answer is debt.

China became a major supplier of cheap commodities, and accumulator of money-capital. It supplied many of these commodities to the US and Europe. In order to sell them and realise surplus value, it required several things. It required workers to be able to buy them i.e. they had to have money; it required merchant capital to distribute them; and it required the services of financial capital to assist with the concomitant capital flows.

As has already been hinted at, and as will be detailed later, merchant capital fulfils a useful function for productive capital, by reducing its costs and time of circulation. Financial capital fulfils a similar function. Both thereby obtain a share in the surplus value produced by productive capital.

Suppose then that we have commodities produced by Chinese capitalist A, and sold in Wal-Mart.

C 1000 + V 1000 + S 1000 = E 3000.

However, in order to realise this $1,000 of surplus value A has to sell them. To establish stores in the US would be very expensive, and Wal-Mart can provide this function far more efficiently. Suppose to sell these commodities, A would have to spend $600, which would be a necessary cost, but as we have seen, in previous chapters, add nothing to the value of the commodity. By contrast, Wal-Mart can do it for just $500.

So, A sells the commodities to Wal-Mart for $2,500. Wal-Mart then sells them for their full value of $3,000. A has realised $500 of the surplus value, whereas otherwise they would only have realised $400. Wal-Mart then obtains a share of the surplus value created by A's Chinese workers. Suppose that Wal-Mart do this with 1,000 similar suppliers. Ignore the fixed costs in stores etc. They will then lay out 1000 x $2500 = $2.5 million for this commodity-capital, and say $100,000 in wages making their total costs $2.6 million. But, their revenue will be 1000 x $3,000 = $3 million giving a profit of $400,000.

However, in the process, this has created jobs and wages for workers in the Wal-Mart store, as well as $0.4 million of profits, which itself circulates in the economy. This in turn provides some of the wages required to purchase the imported Chinese goods. In similar fashion, A and other Chinese producers, pay fees to financial capitalists in the US, in payment for services resulting from capital transactions. That income, paid as wages and profits again provides the money required for the purchase of Chinese goods.

To the extent that these are transactions between capital and capital they produce no surplus value. Only where capital exchanges with revenue, for example the provision of financial services as commodities to individuals, is surplus value produced.

However, this cannot account for all of the imports. The difference, which takes the form of a trade gap, and budget deficit, is itself in turn financed out of the money hoard. At a national level it exists as a trade deficit, financed on capital account, at an individual level it assumes the form of mushrooming private debt. Earlier, it was seen that the surplus value created by one firm could be lent to some other firm. Here, the surplus value is lent to workers. 

It is clearly an unsustainable situation, which periodically manifested itself in increasingly violent financial crises, the latest, but by no means the last of which was in 2008.

“On the basis of capitalist production the formation of a hoard as such is never an end in itself but the result either of a stagnation of the circulation — larger amounts of money than is generally the case assuming the form of a hoard — or of accumulations necessitated by the turnover; or, finally, the hoard is merely the creation of money-capital existing temporarily in latent form and intended to function as productive capital.” (p 353)

The money lent to workers during the period meant that for some of them, they were essentially putting into hock the assets they had built up during the previous long wave boom - their houses, pension funds, share holdings etc. All of which acted as collateral for their borrowing. For others, it simply meant turning themselves into debt slaves, because they have essentially committed large amounts of their future labour-time to repaying capital for the money it has lent them. That in itself implies a problem for capital. It has financed the realisation of its current output at the expense of being able to realise its future output.

In the period following the onset of the Long Wave Boom, since 1999, both the rate of profit and the volume of profit have increased. On the one hand, this provides the basis for a solution, on the other it exacerbates the problem.

China has increased production further and extended its trade across the globe, as well as developing its domestic market. On this basis, the demand for productive capital rises, to use money hoards. On the other, the volume of surplus value has risen faster than the demand for productive capital, as the US and Europe have failed to develop their productive capital, having become more dependent upon merchant and money capital, and hampered by high debt levels, that has gone to finance consumption rather than investment.

Incidentally, this is the main problem with Reinhardt and Rogoff's thesis. Economies in the past have managed high levels of growth where they have had high levels of debt, because the debt has been used to finance investment.

The US, UK and other western economies suffered because rather than using a glut of global money-capital, and consequent low interest rates, to finance a restructuring of their economies, in the 1980's and 90's, they followed the small capital mentality of Reagan and Thatcher, resting upon the economic interests of those sections of society, and of the merchant and money capitalists, who made big profits, and increased their power. That led to an economic model based on low wages and high debt that militated against the necessary focus on investment and restructuring. 

The series of financial crises which are the product of this will only terminate when the underlying disproportion is resolved. That will involve wholesale destruction of the fictitious capital built upon it, in the form of inflated share, bond and property prices, and the ability then to utilise money hoards for the expansion of productive-capital.

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