Another 2008 Is Inevitable - Part 1 of 5

It is the best of times, it is the worst of times; there is great wealth, there is great poverty; there is reduced inequality, there is greater inequality; there is inflation, there is deflation; there is falling unemployment, there is rising unemployment; there is huge debt, there is huge saving; there are very low interest rates, there are astronomically high interest rates; interest rates are falling, interest rates are rising.

The world has never had more wealth than it has today. For a Marxist, wealth is measured by the quantity of use value that exists, and that are being produced. As Marx puts it, a society that can produce two pairs of trousers, is twice as wealthy as a society that can only produce one pair, even if the value of the two pairs is no more than the value of the one pair. Of all the goods and services (use values) produced in Man's entire history, nearly 25% were produced in the first ten years of this century. The reason for this huge rise in global wealth is that from around 30 years ago, there was a massive rise in productivity. That rise was driven by the development of the microchip. The microchip was the base technology which not only increased, in geometrical progression, the processing power of computers, which in turn made possible the performance of analysis in a range of other fields such as genetics, which transformed technology in these other fields, it also made possible, a range of other technologies, such as the Internet, mobile communications and so on which revolutionised technology across almost all sectors of the economy.

Like the situation Marx describes with the trousers, this huge rise in wealth does not mean the same rise in value. The huge rise in productivity means a huge fall in the individual value of each commodity produced. This is the basis of the deflation of commodity prices seen over the last thirty years, not a lack of demand for those commodities, as the Keynesians and Monetarists believe. 

The price of commodities is merely an expression of the relation between two values – an exchange value of one expressed in a quantity of the other use value. As a result, price can change as a result of a change in the value of one or both use values on either side of this equation. If the value of commodities falls, but the value of money remains constant, then prices fall, and vice versa. But, if the value of commodities falls by 50%, and the value of money also falls by 50%, prices remain constant, because both sides of the equation have been changed by the same proportion.

The massive increase in money printing that began in the 1980's, but which increased qualitatively after 2008, brought about a significant fall in the value of money – actually money tokens, but for simplicity money tokens are referred to as money here. Because the dollar acts as world reserve currency, it meant a fall in the value of world money, in the same way that in the past, that happened whenever the value of gold fell – for example, because of the Californian gold rush. The fall in the value of money hid the fall in the value of commodities, so that it appeared as moderately rising prices.

But, not everything that has a price has a value. Land has a price, it is bought and sold as a commodity, it is rented for varying durations. Yet, land has no value, it was not produced by labour; more of it cannot be created by the expenditure of labour. Similarly, money-capital is bought and sold as a commodity in the money market. Its price is the rate of interest. Yet, this money-capital has no value. Like land, it was not produced by labour. Its price is determined solely by the interaction of supply and demand.

So, its clear that the value of these commodities – land and money-capital – cannot be determined by changes in productivity, as is the case with every other commodity; half of zero is still zero. If the value of money is halved, therefore, so that the price of all other commodities remains constant, when their own value halves, the price of land and money-capital must double, ceteris paribus. In the case of land, there has been a massive increase in its price, and an attendant rise in ground-rent. But, if the price of money-capital is the rate of interest, the fall in interest rates seems to contradict that. In fact, there is no contradiction, as will be explained later.

Capital as a commodity, loanable money-capital, is not really capital, as Marx sets out in Capital III, Chapter 25. It is fictitious capital, or at least part of it is. This capital appears to divide in two. If A lends £1,000 to B, who is a productive-capitalist, and B uses it to buy a machine, then A no longer has the £1,000 of loanable money-capital. In fact, B no longer has it either, but they do have £1,000 of productive-capital, in the form of a machine. It is the fact that the machine as real, productive-capital can expand its value, via the production process, that means that B can pay A an amount of interest. If the average rate of profit is 10%, B makes £100 profit. They may then be able to pay a 2% interest on the borrowed money-capital. Had the productive-capital not expanded, then B could only have repaid the sum borrowed, not the interest.

A's £1,000 of money-capital appears to have acted as capital, to have self-expanded by £20, only because it acted as real capital in the hands of B, where it expanded by £100. But, it appears from the transaction, that the amount of capital in existence has doubled, as a result of the loan. B acquired capital of £1,000 in the form of the machine. At the same time, A now has in his possession, a certificate saying that B owes him £1,000 plus £20 interest. For A, this certificate appears to be capital. It can be used as collateral so as to borrow money, for example.

However, as Marx points out, the only real capital here is that in the form of the machine. If A were to try to realise their capital, by calling in the loan, it could only be done by B selling the machine, for example to A. In that case, the “capital” in the form of the loan certificate melts into the air, because the loan no longer exists. In place of the loan, A now has a machine with a value of £1,000. The capital exists only in the form of the machine, despite the appearance. A's certificate is not capital. It is only fictitious capital.

But, this situation is what exists when money-capital is loaned to buy productive-capital, via the issuing of shares or bonds. The capital appears to have doubled. On the one hand it appears as the real capital, in the shape of factories, machines, material and labour-power bought with the money raised from selling shares; on the other it appears as share capital in the hands of those who bought the shares, and thereby loaned money-capital, for the purchase of that productive-capital.

The share and bond certificates are not real capital, but only fictitious capital. The real capital exists in the form of the productive-capital, bought with the money-capital loaned in exchange for stocks and bonds. The owners of those stocks and bonds, as loanable money-capital, obtain interest on them – dividends in the case of shares, coupon payments in the case of bonds. But, as set out above, this interest can only be paid in so far as the productive-capital itself produces a surplus value.

But, for a great amount of the fictitious capital that has been created, there is no productive-capital standing behind it, producing surplus value. For example, if a bank lends £1,000 to A, to buy a house, to live in, the house is not productive-capital. It cannot self-expand in value, because it does not take part in the production process so as to make profit. The land on which it sits may see its price rise or fall for the reasons set out, at the beginning, but the only thing about the house which has value, is the building itself, because only it is the product of labour. Yet, like every other commodity, the value of the building will fall not rise over time, because as productivity rises, so that less labour-time is required for its production, so its value is reduced. The only way its price can rise, as set out earlier, is if the value of money is depreciated by a greater proportion than the fall in the value of the building.

Yet, in the US, UK, parts of Europe and Asia, vast amounts of money-capital has been loaned, by banks, for the purchase of property. The banks, who loan it, expect to be paid interest, as though this money-capital had been used to buy productive-capital, and thereby produce profits, even though it is impossible for this property to produce any surplus value. This is fictitious capital in a double sense of the term, therefore. On the one hand, the loan capital itself is fictitious, but, in addition, the underlying asset itself, is fictitious, it cannot act as capital by creating a profit.

Marx points out, in the chapter referred to earlier, that a large quantity of the bonds, purchased by the banks, are also of this nature. Bonds, issued by the state, are not issued for the purchase of productive-capital. Short term bonds are purchased to fund its revenue expenditure, and longer term bonds finance longer term spending, for large projects, such as the building of roads, dams and so on. The interest paid to the banks by house buyers can only be paid out of their wages, thereby reducing wages below the value of labour-power, which cannot persist for long periods. Ultimately, wages adjust, on average, to the value of labour-power, so the interest paid, is actually a deduction from the total surplus value produced by productive-capital. The interest paid by the state, comes from the taxes it collects, which again ultimately amounts to a deduction from the total surplus value produced in society. This is why, as Marx sets out, the interests of the money-capitalists are ultimately antagonistic to the interests of productive-capitalists.

But, this illustrates one of the basic contradictions, described at the beginning, which make another 2008 inevitable. In fact, it is the fundamental contradiction, which makes such a financial crisis inevitable. On the one hand, all of the loaned money-capital appears as huge amounts of savings, of apparent wealth in the form of highly valued financial assets, hugely inflated stock, bond and property markets, but this wealth is entirely fictitious. On the other side of this, its equivalent is huge amounts of debt – sovereign debt built up by some states such as the US, UK, peripheral Europe etc., as well as private debt in the form of mortgages, credit card debt, student debt etc. But, nearly all of the assets used as collateral for this debt is fictitious too.

I will examine this further in Part 2.