Tesco, has
managed to misplace £250 million. The company, which for years
looked like it was buying up everything, has seen its profits and
share price fall, for some time. With this latest problem, its
valuation is now down to levels where it has itself become a
potential takeover target.
The rise and
fall of Tesco is symptomatic of what was happening in the global
economy during that same period. Tesco is not the only merchant capitalist that has done well, from the mid to late 1980's until
recently. During that period, there was a massive growth of merchant
capital, in general. If, like Marx, we include money-dealing
capital, as opposed to interest-bearing capital, in the category of
merchant capital, its growth has been even larger. That was indeed
the period of the massive rise of shopping centres, across the
country, and of the financial services industry, based largely in
London.
As Marx
describes, in Capital III, this growth in merchant capital is
made both possible and necessary by the growth in productivity, and
the rate and mass of profit, created in production. Merchant capital
is the commodity-capital, and money-capital, of industrial capital that takes on an independent life of its own. Even as part of
industrial capital, it grows as industrial capital grows. It takes
on an independent life, as part of that process, as specific
merchants, and money-dealers, are able to undertake these functions
more efficiently than the productive-capitalists themselves.
Because
surplus value is only created in production, the capital, tied up in
the circulation process, which does not create surplus value, but
must be advanced, so as to realise it, appears as a cost to capital.
The more that cost can be reduced, relatively, by it being performed
by specialist forms of capital, the more surplus value is realised,
and so the higher the rate of profit. The fact that merchant capital
grew so massively, from the late 1980's onwards – not just in
Britain, but the same phenomenon has been seen in the US, Europe and
elsewhere – is an indication of just how much the rate and mass of
profit grew, during that period.
As Marx points out, this cannot be a case of this merchant capital growing at
the expense of the productive-capital. If too much capital flowed
into the former, its rate of profit would fall, and so capital would
leave that sphere, and be invested in production. He says, quite
rightly, that, if the rate of profit for merchant capital was too
high, more capital would flow into that sphere, until the rate of
profit there fell. More capital did flow into that sphere, but its
profits did not fall. They kept rising, which could only be because
the surplus value, being pumped out by productive-capital, was rising
even faster. But, as I set out in my book, Marx and Engels Theories of Crisis: Understanding The Coming Storm this productive-capital was increasingly based in China. UK based
merchants, like Tesco, and US based merchants, like Walmart, were
obtaining a share of the huge increase in surplus value that was
being pumped out by Chinese workers.
That was
convenient, because it meant that many of those British and US
workers, who had lost their jobs, as productive-workers, could now be
employed, by that merchant capital, to sell those goods now produced
in China, and from the wages they were paid, by those merchant
capitalists, they were able to buy some of those imported goods,
especially when they supplemented their wages with credit,
collateralised on increasingly outrageous valuations of assets, such
as property. Provided the bubble in asset prices, particularly
houses, continued, supported by money printing, by central banks, and
so long as a rising rate and mass of profits meant that the supply of
money-capital grew so rapidly as to exceed its demand, so that
interest rates continued to fall, credit could continue to be
extended to keep this fantasy alive.
So long, as
the same rises in productivity that brought about this revolution in
profitability, also kept reducing the value of the commodities being
produced, the easier it was for this to continue, because the lower
values of commodities prevented consumer price inflation from
rocketing, whilst the money printing could fuel massive asset price
inflation, which, in turn, attracted foreign money in, to speculate on
these rising share and bond prices, as well as over priced property,
in places like London. That meant that, despite the money printing,
the value of sterling and the dollar did not collapse.
In Capital
III, Chapter 17, Marx describes how this merchant capital obtains
its share of the total surplus value. Suppose a national capital is
made up of £80 billion of productive-capital and £20 billion of
merchant capital. The productive-capital creates surplus value of
£10 billion. That is, for the productive-capital, considered on its
own, a rate of profit of 12.5%. However, to realise these profits
the commodity-capital must be sold, and this is done by the merchant
capital that seeks to also obtain this average profit. If we include
the value of merchant capital, we have then a total advanced capital
of £100 billion, and so the surplus value of £10 billion
constitutes a rate of profit of 10%.
So, if the
productive-capitalists sell their output to the merchants, at the
price of production, £80 billion plus 10%, that is £88 billion. The
merchants now sell these commodities, but also make the 10% on their
£20 billion of advanced capital = £2 billion. The commodities now
sell for £90 billion, which is their total value. But, Marx points
out that, because the merchant capitalists do not create additional
surplus value, their profit margins are dependent upon the rate at
which they turn over their advanced capital. On the one hand, they
need to turn over their capital faster, in order to reduce costs, and
for each individual merchant, this is also a means of gaining larger
market share. On the other, the more times their capital is turned
over, the lower the profit margin they can make.
The total profit the merchants can make, in the above example, is £2 billion,
or 10% on their advanced capital of £20 billion. But, if this
capital only turned over once in a year, the profit margin, on average, would be 10%, whereas, if it turns over 5 times, during the year, the
profit margin will be only 2%. In other words, the merchant capital
advances £20 billion to buy commodities, which it sells in 10 weeks.
It makes 2% profit margin, or £400 million of profit. It then advances the
£20 billion of capital again, which has been returned to it. After
another 10 weeks, it returns again, with another £400 million of
profit, and so on, so that, over the year, the full £2 billion of
profit has been made, equal to 10% of the advanced capital. If
merchant capital increases the rate of turnover, therefore, its
profit margins fall.
The
importance of that, in respect of Tesco, can now be seen. The
processes, of rising productivity, which, over the last thirty years, have been reducing the value of commodities, and pushing up the rate
of profit, have started to go into reverse. Merchant capitalists, like Tesco, have started to see their costs start to rise, and with
the process above meaning that profit margins – though not the mass
of profit – were being squeezed, that had to mean one of two things
had to happen. Either prices had to rise, or profits had to fall.
With falling real wages, as the mad policies of austerity squeeze
incomes, whilst prices rise, and with the majority of the population
already maxed out on credit, and a large proportion of the
population, even then, reliant on pay day loan sharks, and the
providers of “posh pawn”, for the middle class, shops like
Tesco found themselves unable to raise prices, because that would have
reduced their rate of turnover, reduced their market share further, in
the face of competition from Aldi and Lidl etc., and left them with
vast amounts of fixed capital hanging around their necks as dead
costs. That is a reflection of the fact that far too much capital
was invested in creating way too many shops, and shopping centres,
during that previous period, which could only be sustained so long as
global profit rates were rising sharply.
But, Tesco
also had to satisfy its shareholders, in order to keep its share price
up. If prices could not be increased, but costs were rising, and
profit margins being squeezed, then its obvious that, at some point,
this has to be reflected not just in reduced margins, but also in
reduced profits. That means a falling share price. It seems that
the manipulation of the data was a means of squaring this circle.
There seems
no evidence, at the moment, that Tesco's auditors, Price Waterhouse
Coopers, are implicated in this manipulation of the accounts, but it
is somewhat ironic that, at the same time that this has arisen, Arthur
Anderson, who went bust because of their role as accountants, during
the Enron scandal, have had their name resurrected.
But, it does seem to raise questions as to why businesses spend huge
sums of money, to pay for the services of auditors, if those auditors
are able to miss a £250 million hole in a company's accounts!
We are
likely to see similar cases, over following months. It is a
reflection of the turn in the long wave conjuncture. The general
average rate of profit has started to fall, following a thirty year
period during which it was rising. Productivity is slowing down,
which means the fall in the value of commodities is slowing, and
prices are rising, as the effects of massive money printing, over a
prolonged period, begins to feed through. Central banks face a
conundrum that they must reverse the money printing or face rising
inflation, and a sharp sell-off in bond markets, causing a financial
panic, credit crunch, and sharp rise in interest rates, which will
crater stock markets and property markets, exposing the bankrupt
nature of global banks – thereby obliterating the whole purpose of
QE, which was to hide that fact and provide the banks with breathing
space.
However, if
central banks reverse the QE too fast, asset prices will fall, as the bubbles are burst, and the banks will be exposed anyway. It
looks like this is the end of the line.
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