Wednesday, 17 December 2014

The Long Wave - Part 5

The interaction of the various economic factors can then be seen not as some set of random events, but each affecting the other, and thereby following one from another in a logical progression, whose timing is itself determined by objective material factors. As Marx indicated above, it is the very fact of these high wages, in the Autumn phase, when profits are being squeezed, which causes capital to seek new innovations so as to replace that labour, and to create a relative surplus population. But, as with the development of new sources of primary products, the incentive to develop these new technologies and techniques cannot result in their immediate introduction. As the saying goes, necessity is the mother of invention, and maybe we should add that profit, under capitalism, is the father. It is in those areas where capital seeks to reduce its production costs, be it for constant capital or variable capital, that attention is first directed, because it is in these areas that the developers of such new technologies can find more potential buyers.

The incentive for both types of innovation is strongest in the latter part of the Summer phase, and through the Autumn phase. In the Summer phase, labour reserves start to be used up, first in particular spheres, and then more generally, pushing wages higher. This can already be seen in China, for example, where wages have risen sharply, and led to attempts by China to relocate some production to other low wage economies, such as Vietnam, Indonesia, and increasingly Africa, which is now the fastest growing continent, with 7 of the 10 fastest growing economies located there.

But, in the Summer phase, although the prices of primary products tends to plateau, as new supply comes on stream, this also has the effect of causing a slow down and even cessation of new exploration and development, as the former rapid price rises cease, and even some sharp price falls occur where there is overproduction. The cessation of exploration and development, thereby causes the growth of supply to slow down. Prices stabilise rather than continuing to fall, and increase modestly as demand continues to rise during the Summer phase. In the Spring phase, industrial capital can cope with the rising prices of primary products because of two factors, firstly the strength of demand growth, and secondly the ability to use new innovations, developed in the previous Winter phase, that raise productivity, and so reduce unit costs, thereby mitigating the effect of these price rises. But, in the Summer phase, the benefits of rising productivity from the previous Innovation Cycle, start to diminish, so the ability to absorb rising input costs by higher productivity declines. That reaches its height during the Autumn phase, thereby squeezing profits to the highest degree, and creating the greatest incentive to develop new techniques and technologies to replace labour, and to reduce the cost of constant capital.

It is frequently, not the development of some completely new science or technology that is involved, but the application of existing science and technology in new ways that creates the new base technology. The use of the ability of steam to expand, as a source of power, for example, goes back a long way. As George Ray in the January 1980 Lloyds Bank Review (Number 135) “Innovation in the Long Cycle”, comments,

“The first scientist who understood the power of steam and the uses of cylinder and piston was Hero of Alexandria, in the first century AD!”

But, it is the requirement of industrial capital for power on a significant scale to power machines, and to replace the expensive and inefficient labour-power, horse-power, wind-power and water-power, that makes it practical to apply that science to the development of the steam engine.

As Marx described above, in “Value, Price and Profit”, agricultural wages rose for ten years between 1849 and 1859, before the introduction of such new technologies began to be able to replace labour on a scale sufficient to create a relative surplus population, and to begin to reduce wages, and thereby raise surplus value.

But, this development of innovations to resolve problems encountered in production, has another important consequence for the long wave cycle. That is that the base technologies thereby developed, form the basis not just of new production techniques, and technologies, but also form the basis of entire new consumer industries. The development of the steam engine, for example, led to the development of the steam locomotive and steam boat, which in turn led to the development of passenger travel and tourism, on an unprecedented scale, which in turn led to the development of seaside holiday locations, and the tourist industry. Nearly every new consumer goods industry has arisen in the same way, based on technologies that were originally designed to resolve some problem in production, and to reduce production costs. I will come back to the effect of this on the long wave cycle later.

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