Tesc – O – Shit

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.