Sunday, 30 November 2014

Capital II, Chapter 20 - Part 29

10) Capital and Revenue: Variable Capital and Wages 

“The entire annual reproduction, the entire product of a year is the product of the useful labour of that year. But the value of this total product is greater than that portion of the value in which the annual labour, the labour-power expended during the current year, is incorporated. The value-product of this year, the value newly created during this period in the form of commodities, is smaller than the value of the product, the aggregate value of the mass of commodities fabricated during the entire year.” (p 441) 

The difference between the two is the value of the constant capital whose value is not provided in the current year, but is transferred to the value of this year's output. The value of that constant capital may have been created last year, or in year's prior to that. The more fixed capital of long duration is accumulated within the economy, the more this value will have been created in the more distant past.

“It is by all means a value transferred from means of production of former years to the product of the current year.” (p 441)

In the current example, the total value of output is equal to £9,000, but the consumption fund, the value of the new labour, added in the current year, is only equal to £3,000. That is equal to the new labour added in both Department 1 (£2,000) and Department 2 (£1,000). The difference of £6,000 is the value of the constant capital transferred into the value of national output. Of Department 1's total output, of £6,000, two-thirds, or £4,000 are required just to reproduce the constant capital used by Department 1 itself. That leaves £2,000 of Department 1. This £2,000 of constant capital is sold to Department 2. Department 2 sells £2,000 of consumer goods to Department 1, thereby covering the consumption needs of Department 1 workers and capitalists.

“From the standpoint of society, two-thirds of the labour expended during the year have created new constant capital-value realised in the bodily form appropriate for department II. Thus the greater portion of the annual labour of society has been spent in the production of new constant capital (capital-value existing in the form of means of production) in order to replace the value of the constant capital expended in the production of articles of consumption.” (p 442)

In other words, the purpose of production is the production of consumption goods. Robinson Crusoe does not want a bow and arrow or a fishing net for its own sake, but only the better to catch fish and game to consume. The point of producing steel is not for its own consumption, but to be able to produce consumption goods.

In this example, two-thirds of available labour-time was used to produce not consumption goods, but production goods. This is not because society desires more production goods for their own sake, but because the production of these producer goods is necessary for society to produce the consumption goods it requires. To achieve that, it is not only necessary to produce the constant capital needed to produce the consumption goods, it is also necessary to produce the constant capital required for the production of constant capital itself.

Saturday, 29 November 2014

Black Friday

A 24 hour news media needs to have crazes and events as stories to justify its existence.  Yesterday's was "Black Friday".  In fact, like other artificially created crazes such as "Trick or Treating", it has been imported from the US.  But, even in the US, "Black Friday" always meant something different, to what the media currently present.

The origin of Black Friday is that it was the point in the year where retailers accumulated income exceeded their costs.  In other words, it was the point where their profit and loss account went into the black - hence Black Friday.  Of course, even that is a bit false, and reminiscent of the claims of capitalists and their apologists in the 19th century in respect of what Marx termed "Senior's Last Hour".

The economist, Nassau Senior, presented the argument on behalf of industrialists against the introduction of the ten hour day.   As set out in the link above, the basic argument was that during most of the day production was only creating sufficient potential revenue to cover costs, so that it was only during the last hour of the day that workers were creating additional value, that enabled the capitalist to make profits.  Reduce the working day, the argument went, and the capitalist would be able to make no profits.  The argument was, of course, nonsense, as Marx demonstrates, and as Marx himself says, to be fair to Senior, he later rejected the argument as false.

In reality, each commodity unit produced and sold comprises its own fraction of surplus value, created by the workers.  However, there is an element of truth in the argument if the difference between fixed and variable costs are taken into account.  Every business has some fixed costs to cover things such as the purchase or rent of a building, the cost of heating and lighting and so on, which it has to pay no matter how much it is producing or selling.  That is in contrast to its variable costs which increase as the amount it produces or sells rise.  A firm that produces commodities will pay more for materials and labour-power, if it produces more commodities.  A retailer will pay more for the stock it buys, and possibly for the wages it has to pay, the more commodities it sells.

As a result, in order to cover these fixed costs, there is a minimum quantity of commodities that must be sold, before a firm starts to make profits.  The break-even point.  After that point, assuming the firm's revenue is greater than its variable costs, all of the revenue above the variable costs adds to its profits.  That was the origin of Black Friday, and nothing to do with give away sales.  The give away sales essentially arose, because Black Friday comes the day after the big US Thanksgiving Holiday, which is the start of the Christmas Holiday season.

It is perhaps no surprise then that, the UK has also started marking Thanksgiving, even though the history of that festival is purely specific to the US.

But, perhaps there is another reason to denote yesterday as Black Friday.  According to news reports, a number of people in the UK were injured in scrambles to obtain "Black Friday" sale bargains.  Such occurrences are not unusual in the US.  Perhaps we should denote it as Black Friday also because it denotes the willingness of people to scramble over other human beings in order to gamble on being able to make some minor financial gain for themselves.  All that was missing to complete the picture was that all those who had clawed their way over the mangled bodies of their fellow human beings, in order to get to the ephemera, should carry off their prizes in white vans festooned in the flag of St. George!

It affirms Chomsky's point about neo-liberalism.

"Instead of citizens, it produces consumers. Instead of communities, it produces shopping malls. The net result is an atomized society of disengaged individuals who feel demoralized and socially powerless." 

(Profit Over People: Neoliberalism & Global Order - Noam Chomsky)

Northern Soul Classics - Something New To Do - Bobby Sheen

A great Northern ballad from Dr. Love himself.


Friday, 28 November 2014

The Rate of Surplus Value

The rate of surplus value, also termed the rate of exploitation, is the ratio of surplus value to the variable capital laid out to produce it. According to Marx, it is the true measure of the degree to which surplus value is being extracted, because, unlike the rate of profit, it measures surplus value only against the source of that surplus value. The rate of profit measures surplus value not just against the labour-power that produces it, but also against the constant capital, so the rate of profit must always be less than the rate of surplus value. The rate of profit is favoured by the capitalists, and by their apologists, because it disguises the source of the surplus value, and gives the appearance that profit is produced by all of the capital employed.

In fact, Marx points out, because an increase in fixed constant capital is often associated with at least a relative decline in the quantity of labour-power employed, it is often portrayed as though it is the fixed constant capital rather than the variable capital that is the source of profits.

The rate of surplus value is given by s/v x 100, where s is the surplus value, and v is the variable capital. The rate of profit is given by s/(c + v) x 100, where c is the constant capital. Here the value of the commodity is given by c + v + s. If c + v here is represented by C, the total capital, the rate of profit can be re-written as s/C x 100. In addition, C here is the cost of production. Because, as Marx points out, capitalists only introduce new machines if they cost less than the paid labour they replace, an increase in c, reflecting an increase in machinery, that causes a larger fall in v, at the level of the individual firm, appears to result in an increase in profits, due to the additional constant capital.

That is because the individual firm continues to sell its output at the market price. If we put numbers to the above this can be seen. Suppose, we have c made up of fixed capital, in the shape of tools, that amount to £100, and materials (circulating constant capital) that amount to £400, and we have labour-power of £2,000. If the tools are fully used up during the year, the cost price of the year's output is £100 + £400 + £2,000 = £2,500. If the rate of surplus value is 50%, then this means that the surplus value is 2000 x .50 = £1,000. The selling price of the output is then £3,500, and the rate of profit is 1000/2500 = 40%.

Assuming that this is the average composition for the industry, and that the commodity sells at its value, the market value of this output will then be £3,500. This firm will continue to sell its output at this price. However, if we assume it introduces a new machine the effect can be seen. Suppose, it replaces its existing tools with a machine that costs £600, which also replaces half of the existing workers. In that case, the firm's costs are £600 fixed capital + £400 materials + £1,000 labour-power = £2,000. But, the firm continues to sell this output at the market price of £3,500, so its profit is now £1,500, rather than £1,000. It appears that this profit has been created by the additional fixed constant capital employed.

In fact, however, this is an illusion. The additional fixed constant capital has not created additional profit, it has simply reduced the costs of this particular capital. The individual value of its output is now lower than the social value of the output. As soon as this machine is used by all other firm's in this industry, the appearance of the additional profit disappears, because the individual value, and social value are once more the same. Assuming that the output of the industry continues to sell at its value, we would have:

fixed capital £600 + circulating constant capital £400 + labour-power £1,000 = cost price £2,000. If the rate of surplus value remains at 50%, the surplus value would then be only £500, giving a market value of £2500. The rate of profit falls from 40% to 25%, despite the fact that the rate of surplus value for the industry is unchanged. Moreover, the total capital employed has fallen from £2,500 to only £2,000. The reason the rate of profit has fallen, is that, although the rate of surplus value remains constant, the amount of variable capital employed has fallen, so the total mass of surplus value has fallen, and has fallen by a greater proportion than the fall in the total capital employed. The important elements here then in deciding the amount of profit, and the rate of profit, is the rate of surplus value, and the mass of variable capital employed.

If we take the individual firm above, its variable capital is £1,000, whilst the surplus value it appropriates is £1,500. In other words, its rate of surplus value has risen from 50% to 150%. Marx argues that, in such cases, it is as though the value produced by the particular labour-power has trebled, or that it has become the equivalent of complex labour. At the same time that the value produced by this labour has risen, the value of the labour-power itself has not changed, and this results in the rise in the rate of surplus value.

“The exceptionally productive labour operates as intensified labour; it creates in equal periods of time greater values than average social labour of the same kind. (See Ch. I. Sect 2. p. 44.) But our capitalist still continues to pay as before only five shillings as the value of a day’s labour-power. Hence, instead of 10 hours, the labourer need now work only 7½ hours, in order to reproduce this value. His surplus-labour is, therefore, increased by 2½ hours, and the surplus-value he produces grows from one, into three shillings. Hence, the capitalist who applies the improved method of production, appropriates to surplus-labour a greater portion of the working day, than the other capitalists in the same trade. He does individually, what the whole body of capitalists engaged in producing relative surplus-value, do collectively. On the other hand, however, this extra surplus-value vanishes, so soon as the new method of production has become general, and has consequently caused the difference between the individual value of the cheapened commodity and its social value to vanish. The law of the determination of value by labour-time, a law which brings under its sway the individual capitalist who applies the new method of production, by compelling him to sell his goods under their social value, this same law, acting as a coercive law of competition, forces his competitors to adopt the new method.”

Capital I, Chapter 12

Marx makes the point that a similar situation arises with labour-power considered at an international level. If, for example, Britain's textile industry employs lots of machinery that raises the productivity of British workers, whereas the textile industry in India (which in 1800 accounted for 25% of global textile production) continues to be based on handicraft and manufacturing, then the global price of textiles may continue to be determined by the lower level, higher value production. But, as with the example above, the British production would churn out much larger quantities of textiles, with less labour employed, and so with a lower individual value. It would be as though the British workers labour was higher value, complex labour, compared with the labour of the Indian worker.

“But the law of value in its international application is yet more modified by the fact that on the world-market the more productive national labour reckons also as the more intense, so long as the more productive nation is not compelled by competition to lower the selling price of its commodities to the level of their value. 

In proportion as capitalist production is developed in a country, in the same proportion do the national intensity and productivity of labour there rise above the international level. The different quantities of commodities of the same kind, produced in different countries in the same working-time, have, therefore, unequal international values, which are expressed in different prices, i.e., in sums of money varying according to international values. The relative value of money will, therefore, be less in the nation with more developed capitalist mode of production than in the nation with less developed. It follows, then, that the nominal wages, the equivalent of labour-power expressed in money, will also be higher in the first nation than in the second; which does not at all prove that this holds also for the real wages, i.e., for the means of subsistence placed at the disposal of the labourer. 

But even apart from these relative differences of the value of money in different countries, it will be found, frequently, that the daily or weekly, &tc., wage in the first nation is higher than in the second, whilst the relative price of labour, i.e., the price of labour as compared both with surplus-value and with the value of the product, stands higher in the second than in the first.”

(Capital I, Chapter 22) 

The consequence of this is that, even though the Indian worker may be paid much lower wages than the British worker, the British worker would have a higher rate of exploitation, they would produce more surplus value, the price of Indian labour would then be higher. That is why, despite higher wages paid to workers in more developed economies, it is usually the case that the rate of profit, in these economies, is higher, because of the higher rate of surplus value, arising from the higher level of labour productivity. This is also why the majority of investment, from developed capitalist economies, goes not to less developed economies, but to other developed economies. It only becomes profitable to export capital to low wage economies, where the low wages can be combined with the same kind of high levels of productivity obtained in developed economies.

This same phenomena is also why workers, employed by large businesses, are often paid higher wages, and obtain better conditions, than workers employed by small, inefficient businesses. The higher rate of surplus value enables the firm to pay higher wages, and yet still obtain larger profits. As Marx and Adam Smith put it, wherever wages are low the price of labour (unit labour costs) is high, because the existence of low wages act as a disincentive for capital to invest in new machines and techniques that raise productivity. This comes down to the fundamental determinant of the rate of surplus value, which is the relation between the portion of the day which constitutes necessary labour, and that which constitutes surplus labour, which, in turn, is represented by the portion of the day during which labour produces the necessary product, and the portion during which it produces surplus product.

In every society, the Law of Value functions to ensure that not only is the production of each type of product undertaken with the least expenditure of labour, but the total labour-time of the society is expended in such a way as to maximise the use value produced. That is why agriculture in different parts of the world took on different forms and characteristics. A society that needs to meet its basic needs for food will focus its labour-time on the production of those types of foodstuff that it can produce most easily, given the particular conditions of climate, soil type, drainage and so on. By concentrating on those foodstuffs that provide the greatest nutrition for the least expenditure of social labour, the society, thereby, releases surplus labour-time that can be used for other purposes, and for the production of other products, which can be accumulated as means of production, thereby raising the level of social productivity.

A society which lives in an area that is dominated by mountains, for example, will require more labour-time to produce a given amount of wheat than one that lives in an area dominated by large prairies. The former will, therefore, find it more efficient to focus its labour-time on herding sheep as a food source, rather than growing wheat. In that way, less labour-time needs be expended to produce the food required to ensure the reproduction of labour-power, and the product produced over this amount constitutes a surplus product, as a product of labour, it has value, because value is labour.

The surplus product here then represents a surplus value, and this surplus value is also the basis for the wealth of the ruling class of the particular society. The ratio between the surplus labour and the necessary labour, is the same ratio as between the surplus product and the necessary product, and is equal to the rate of surplus value.

In Capital III, Chapter 10, examining the way a general rate of profit develops, along with the development of capitalist production, out of petty commodity production, Marx examines this form of the rate of surplus value. The non-capitalist, petty commodity producer sells their output at its exchange value rather than its price of production. All they are concerned with, Marx says, is to be able to recoup, in the price of the commodity, the value they have laid out in means of production, along with the value of the product of their own labour.

For similar reasons to those set out above, the Law of Value again here leads to an equalisation of the rate of surplus value. The small producer will have their day divided into necessary labour and surplus labour. This is true whether they are a direct producer who spends part of the day providing for their own consumption, and another part of the day producing a surplus product, or whether they are a small commodity producer, who spends part of the day producing a commodity, which they sell, in order to be able to buy the commodities required for their necessary consumption, and a further period during which they produce a surplus product, which they sell and thereby obtain a sum of surplus value, in money form.

If the particular small producer finds that they are producing a commodity whose value is such that they have to devote a greater portion of their working-day to meet their necessary requirements, than the average, they will tend to move to some different type of production which they can undertake more efficiently. In that way, although there is no process for bringing about an average rate of profit, as exists under capitalism, the Law of Value does operate, under petty commodity production, to bring about an equalisation of this rate of surplus value. This equalisation of the rate of surplus value applies also to capitalist production.

“The fact that capitals employing unequal amounts of living labour produce unequal amounts of surplus-value, presupposes at least to a certain extent that the degree of exploitation or the rate of surplus-value are the same, or that any existing differences in them are equalized by real or imaginary (conventional) grounds of compensation. This would assume competition among labourers and equalization through their continual migration from one sphere of production to another. Such a general rate of surplus-value — viewed as a tendency, like all other economic laws — has been assumed by us for the sake of theoretical simplification. But in reality it is an actual premise of the capitalist mode of production, although it is more or less obstructed by practical frictions causing more or less considerable local differences, such as the settlement laws for farm-labourers in Britain. But in theory it is assumed that the laws of capitalist production operate in their pure form. In reality there exists only approximation; but, this approximation is the greater, the more developed the capitalist mode of production and the less it is adulterated and amalgamated with survivals of former economic conditions. 

(Capital III, Chapter 10).

This is also the basis, under capitalism, for the increased extraction of surplus value via relative surplus value, rather than absolute surplus value.

Thursday, 27 November 2014

Refusal of Mortgages to Over 40's Shows Property Bubble Must Burst

A report from the Intermediary Mortgage Lenders Association shows just how ridiculous property prices have become, and why the bubble must now burst. Under the new mortgage rules introduced in the summer, lenders have to assess that borrowers will be able to repay it over the lifetime of the loan. With banks every week being fined billions of pounds for various forms of past misselling, they claim to be afraid of future similar fines, if they fail to adhere to these new guidelines.

Maybe, but its just as likely that the banks are more worried about themselves not getting their money back from overstretched borrowers, in a climate where property prices are in for a prolonged collapse. The basis of the refusal to lend to the over 40's and some in their late 30's, is that with a standard 25 year mortgage, anyone over 40 will still be trying to pay it off after they have retired, and their pension income is unlikely to be sufficient.

One answer to that would be for borrowers to take out 10, 15 or 20 year mortgages, but now that interest only mortgages have effectively been scrapped, such a shorter term mortgage would mean significantly higher monthly repayments. That means that despite the historically low current interest rates, many potential borrowers lack the necessary income to cover those repayments.

This is the real problem, and not the fact that people are taking out mortgages later, or that lenders now have to pay more attention to the ability of borrowers to repay. It has always been the case that people took out mortgages later in life, sometimes even extending to after they would retire. People in their forties frequently sold the houses they had bought when they first got married, in order to move up to something better. The difference is that in the past, house prices did not start off at such ridiculous levels, and they did not increase in price by such ludicrous amounts. That meant that someone who had maintained a reasonable job, was able to have paid off a large chunk of their original mortgage, and to have saved money to cover the difference required to by a better house.

Suppose you started off buying your first house in 1960. It might have been a terraced house costing £500, for example. If you'd stayed in employment, by 1970, you might have saved up say £800. In the same time, the price of the terraced house might have risen to £600. You would then put this total of £1400 together to buy a nice new semi-detached costing £1,500 in 1970, leaving you with only an additional £100 to add to what was outstanding on your mortgage. Over the last 20 years or so that would be impossible. Firstly, the initial price of houses was so high, that many people were stretched to cover the mortgage payments. They then had to borrow on credit to cover other purchases, for cars, durable goods etc. So, the chance of saving any money was extremely limited.

But, even if you could save, the price of houses was rising faster than the ability to do so. If you had a £15,000 house in 1990, it might have risen in price to a £75,000 house by 2010, but, the £50,000 house you had your eye on to move up to in 1990, was now a £250,000 house. The £35,000 gap you had to save up to cover in 1990, had become a £175,000 gap, and wage rises certainly had not and were not likely to go anywhere near covering that difference.

That is why from the late 1980's, as Thatcher deregulated financial markets, and started fuelling the debt binge that led to repeated bubbles, and the financial crashes that pockmarked the intervening period up to 2008, the bubbling up of property prices went along with the continual expansion of the income multiple. That is, in the past, the average house price was around three times the average income. Today, it is more like six or seven times, and in London it is as high as twelve times. That also hides a variety of other factors, which make the situation worse. 

If you measure house prices in each area against the actual median wages in that area, the actual relation is much higher, and closer to ten than six, in most areas. In 1971, 79% of UK households were multi-occupancy, 70% were occupied by married couples. Only 19% were occupied by single people, with a further 2% occupied by lone parents. By 2011, those figures had changed drastically. Only 59% were multi-occupancy, the number of married couples had dropped to just 40% with a further 12% co-habiting, and another 7% other multi-occupants. By contrast, the number of homes occupied by one person had almost doubled to 33%, with 8% occupied by lone parents. 

So, where in the past the average house was priced at only 3 times average earnings, there were usually two people on those average earnings paying to buy it, whereas today there is frequently only one! That is also a change that was encouraged by the Thatcher government, as it encouraged the development of a debt fuelled bubble economy.

The real problem is that house prices have simply been led up into an unsustainable bubble that could only be maintained so long as the amount of private debt could continue to be inflated. As once contributor to the Independent commented,

“First time buyers are now over 40 in some parts of the UK - and now over 40's can't get a mortgage. Apart from BTL landlords and money launderers who exactly is going to be buying all these properties to keep the prices propped up to unaffordable levels.

The property market has finally eaten itself.”

But, as was seen recently even the biggest BTL landlords are getting out, because they see that the market has peaked.

This is before borrowers realise the extent to which their repayments are likely to rise. The media keep pushing the line that central bankers will keep interest rates low. But, central bankers can no more keep interest rates low than they can keep any other price low. Interest rates like every other price are determined by the market, and the market globally is pushing interest rates higher. With interest rates in Britain at current levels that are as low as they have been in 300 years, even a modest absolute rise, will amount to a large percentage rise. If mortgage rates rise from 3% to 6%, that does not mean that monthly mortgage payments rise by 3%, it means they double! Someone paying £1500 a month now, would have to find an additional £1500 a month, or £18,000 a year. 

But, even a 6% mortgage rate would be below the historic average for mortgages. If mortgage rates went from 3% to 8%, then someone currently paying £1500 a month, would find themselves paying closer to £4,500 a month! This is the real reason banks are limiting loans to only those with the best chance of repaying the loans. For the last five years, banks have operated on the basis of “extend and pretend”. That is faced with large numbers of borrowers, who essentially could not maintain their mortgage payments, they have allowed borrowers to extend the length of the mortgage, and add their debts to the amount to be repaid. That allowed banks to pretend that these loans had not really gone bad. It meant the banks did not, therefore, have to begin foreclosing on the mortgages, which would have caused a firesale of properties, provoking the inevitable property crash.

Banks, therefore, have had no incentive to add to their stock of bad loans, even with the government acting as guarantor of 20% of the loan. But, as interest rates necessarily rise, the number of defaults must necessarily rise, and the policy of “extend and pretend” will be no longer sustainable, especially as the UK economy suffers a sharp slow down. The banks are trying to protect themselves against that inevitable property crash, but the bubble has been blow up so big that, when it bursts, it will be on a scale never seen before. Britain will face the same kind of property crash that already played out in the US, Ireland and Spain, but even bigger, because the bubble here itself is bigger, and the banks are unlikely to be able to escape the consequences.

Wednesday, 26 November 2014

Capital II, Chapter 20 - Part 28

The various calculations of the rate of profit, on these figures, of National Income, are then no such thing. National Income is only a measure of the new value created by workers that year. Breaking it down into wages on one side and profits, rent and interest on the other (or property income as some would have it) does not give a measure of the rate of profit, as defined by Marx, i.e. s/c+v, but only a measure of s/v, or the rate of surplus value.

Given the significant changes in the value of c, that Marx describes, arising from the constant revolutionising of the means of production, such measures are next to useless for gauging changes in the rate of profit itself.

Adam Smith, however, has promulgated this astounding dogma, which is believed to this day, not only in the previously mentioned form, according to which the entire value of the social product resolves itself into revenue, into wages plus surplus-value, or, as he expresses it, into wages plus profit (interest) plus ground-rent, but also in the still more popular form, according to which the consumers must “ultimately” pay to the producers the entire value of the product. This is to this day one of the best-established commonplaces, or rather eternal truths, of the so-called science of political economy.” (p 438)

Marx describes the argument by looking at the production of shirts with a value of £100. The costs of these shirts also include the wages and profits paid to all those who provide the materials going into their production, the flax growers, spinners, weavers, bleachers, the transport companies and so on. 

“The consumers of the shirts pay these £100, i.e., the value of all the means of production contained in the shirts, and of the wages plus surplus-value of the flax-grower, spinner, weaver, bleacher, shirt manufacturer, and all carriers. This is absolutely correct. Indeed, every child can see that. But then it says: that’s how matters stand with regard to the value of all other commodities. It should say: That’s how matters stand with regard to the value of all articles of consumption, with regard to the value of that portion of the social product which passes into the consumption-fund, i.e., with regard to that portion of the value of the social product which can be expended as revenue.” (p 439)

But, of course, the total value of the economy's output is far greater than that which comprises the consumption fund, i.e. which constitutes revenue. A large proportion of the output goes into the production of producer goods, and not just those used up in producing consumer goods, but also those used up in producing producer goods themselves. In other words, all of v+s is used up and appears to buy all of the social output, only because what v+s buys is limited to that portion of total output that comprises the consumption fund. That portion of total output that comprises the capital fund simply replaces its own value.

Reminding ourselves of our model set out previously, it is:

Department 1 c 4000 + v 1000 + s 1000 = 6000

Department II c 2000 + v 500 + s 500 = 3000

The constant capital is replaced in two ways. Firstly, Department 2 capitalists replace the constant capital consumed in the production of consumer goods, via an exchange with Department 1. Department 2 buys constant capital from Department 1. With the money it hands over, Department 1 capitalists are able to pay wages and realise surplus value. Department 1 workers and capitalists use those wages and surplus value to buy consumer goods. Alternatively, Department 1 workers may buy consumer goods with wages advanced to them, and Department 1 capitalists may buy consumer goods with their own money hoard. Then Department 2 capitalists have the necessary money to buy constant capital to replace that used up.

The £2,000 value of Department 2 output, that is equal to the constant capital used up, cannot be used by Department 2 capitalists, as revenue, because it must be used to replace the constant capital. The £2,000 of value, represented by the constant capital produced by Department 1, and equal to Department 1 wages and surplus value, cannot be consumed by those workers and capitalists, because they are not consumer goods.

“We have here, then, a sum of values to the amount of 4,000, one half of which, before and after the exchange, replaces only constant capital, while the other half forms only revenue.” (p 440)

The constant capital of Department 1 is by contrast replaced in kind. That can take two forms. Firstly, one Department 1 firm can sell means of production to another, e.g. a coal company selling coal to a steel producer. There are many variations on this. The value of the coal supplied could be met by an exchange of steel in return, but probably not. Rather the steel producer will supply steel to a range of other producers of means of production, some of whom will in turn supply constant capital to the coal producers. But, the coal producers will also supply coal to themselves, the steel producers will do the same, farmers will supply themselves with seeds, livestock and so on.

All of those exchanges, within Department 1, form a part of the total national output, and yet do not form a part of national income, because they never form a part of revenue. They are only mutual exchanges, within Department 1, that replace its constant capital.

“The phrase that the value of the entire annual product must ultimately be paid by the consumer would be correct only if consumer were taken to comprise two vastly different kinds: individual consumers and productive consumers. However that one portion of the product must be consumed productively means nothing but that it must function as capital and not be consumed as revenue.” (p 440) 

If the total value of output of £9,000 is divided not into c+v+s, nor into v+s but solely into capital £6,000 and revenue £3,000, then the variable capital disappears. Now wages, appear simply as part of the same revenue out of which the profits are paid. In that case, that revenue appears not as the product of labour but as the product of the (constant) capital employed.

“This conclusion is actually drawn by Ramsay. According to him, capital, socially considered, consists only of fixed capital, but by fixed capital be means the constant capital, that quantity of values which consists of means of production, whether these means of production are instruments or materials of labour, such as raw materials, semi-finished products, auxiliary materials, etc.” (p 440)

In this scheme, labour does not even form a necessary element of wealth creation, and only exists because the poverty of the mass of the people prevents them owning and employing their own capital.

“Here we see once more the calamity Adam Smith brings on by submerging the distinction between constant and variable capital in that between fixed capital and circulating capital. Ramsay’s constant capital consists of instruments of labour, his circulating capital of means of subsistence. Both of them are commodities of a given value. The one can no more create surplus-value than the other.” (p 441)

Tuesday, 25 November 2014

The Thornberry Paradox

Why was Emily Thornberry forced to resign? Why did Ed Miliband say that her tweet showing an uncaptioned picture of a house in Rochester, draped in England flags, in front of which stood a white transit, made him more angry than anything else had done?

The fact is that the Labour leadership are stuffed full of middle class professional politicians. They know it, we know it, the electorate know it. And for that reason, they are extremely touchy about the subject, and any suggestion that they might be out of touch with ordinary working-class people, especially as that is one of the main charges they level against the Tories. So, when the media picked up on Thornberry's tweet, which they interpreted as sneering at workers, they felt an immediate panic that could only be quelled by the most over the top response, of sacking Thornberry, and coming out with the most gut wrenching pronouncements, about how when they saw white vans it immediately instilled in them thoughts about hard working British patriots.

But, the surreal thing is that Thornberry herself grew up on a council estate, unlike many of those within the labour leadership, who flew into a panic and demanded her resignation. Thornberry's tweet, was if anything a far more authentic working-class response, than anything the Labour leadership, the Tories or the middle class pundits, all of whom are cut from the same cloth, have come forward with.

To the extent that her tweet was sneering, it was only sneering in the same way that many genuine working-class people sneer at many of those for whom this picture is emblematic. Ed Miliband when he sees a white van might immediately think of hard working people, but the thoughts that go through many real hard working peoples minds is at best – other than for the colour – Del Boy and Rodney, and more usually it is with rogues who are not so lovable. I can say this fairly confidently, because, at one time, when I ran my own business, I used to drive a big, old, yellow twin wheel transit, and my kids used to hate me dropping them off at school in it.

When Ed Miliband sees English flags draped out of house windows he thinks of hard working patriots, but when many ordinary real working-class people see that in the context they often encounter it, on their estates, they think about loutishness - the same kind of loutishness that Britons are renowned for overseas - and anti-social behaviour.

  As one contributor to the discussion on Phil's blog put it,

“These right-wing journos were never in Goldenhill on one of the nights when an excuse is found to let off fireworks when most people (Sun-readers included) are in bed.

They wouldn't be eulogising people like Dan Ware if, like me, they actually had them for neighbours. That's what I'm saying.”

As I said last week, there is nothing unusual about seeing England flags, or Union flags draped on houses, but nor is it ubiquitous, or a characteristic trait of being working-class. Often, even when it is just a temporary phenomenon, like putting up overdone Christmas lights, associated with some event, like a big football or cricket match, it reflects the extent to which that flows over, or is itself an expression of nationalistic sentiment. But, its also often an expression of the character of the individual, who wants to always be able to impose themselves on everyone else, by having the most visible manifestation, just as often, as with Asquith's comment, they have to have the most, the noisiest fireworks, let off whenever they choose, irrespective of their neighbours, or who must always have loud music emanating from their house, or car speakers.

This kind of individualism, has nothing in common with those aspects of working-class life that are a rejection of such selfish individualism, and which by contrast, are founded upon collective solidarity and mutual respect and concern. The former characteristics are usually found, not amongst the real working-class, but amongst all those peripheral layers whose outlook is based on their ability, as individuals, to make their way in the world, be it as some kind of wide boy trader, or those that live off the proceeds of less savoury aspects of the black economy. That individualism was reflected in the kinds of elements who came on to the streets to burn and loot in the riots of 2011, whereas the latter are reflected in those workers who came together collectively to defend their communities from them.

As Phil put it in his blog post, 

“Knowing a thing or two about theSun-reading working class - it's where I come from, after all - I can tell you what their army of readers are likely to think. They see a skinhead with a thuggish appearance, a first impression they'll probably stick with when they learn he's a some-time cage fighter. Compounding the unfavourable vibes is his occupation - he owns and runs a used car dealership. And last of all, Ed Miliband might feel respect when he walks by a house festooned like Dan's. Most Sun readers on the other hand would barely notice, or at best think the resident is a bit of a nob. Contrary to what the hacks and the politicians think, the majority of working class people feel that showy displays of patriotism outside of European/World Cup tournaments is tacky and vulgar. So stick that in your pandering, patronising pipe and smoke it.”

And nor is that just the Sun reading working-class. I grew up in the same Goldenhill that Asquith refers to above.  My parents would never have read the Sun. But, like most of the other people who lived on Goldenhill, as a former mining village, you could not get much more real working-class. One of my grandads worked in three foot seams in the pit with hand tools, the other was a colliery fitter. My father was an engineer who as a 20 year old, in 1939, worked in the car factories in Coventry, Rugby, West Bromwich and elsewhere, being continually moved from one to another, and eventually had his cards literally filled with black ink, to prevent him getting further employment, because of his trade union activities.  But, they and the other people in the street, had a similar viewpoint, as well as a disregard for all those in the street who were considered to be shirkers of one form or another.

After all, the basic principle of Socialism as set out by Marx and reiterated by Lenin is "He who does not work, neither shall he eat."  That applies to all those who would leach off the working-class, not just the rich.  In the 19th century, when workers were setting up co-operatives, one of the principles was that they would be a means for finding work for their unemployed members.  There is nothing wrong with the principle that a social insurance fund, such as that established by the co-operatives, should not operate on the basis of expecting its members to take whatever work it is able to provide for them, in return for payments out of that fund.  The whole problem with workfare schemes is not that principle, but that national insurance funds, are not established by workers, nor run by workers for their benefit, but, like the whole of the welfare state, are established by capital for the benefit of capital.

The problem for Labour in dealing with this is that their entire perspective has become bifurcated. On the one hand, as far as their macro-economic strategy is concerned, it has accepted all of the nostrums of free market conservatism, that have been developed over the last thirty years. They have failed to even confidently advance those aspects of social-democratic strategy that are in the interests of big industrial capital, which is why they have even retreated in the face of the conservative attack over immigration and Europe. The policy put forward by Rachel Reeves to prevent EU migrants being able to claim benefits for two years, is essentially to oppose the free movement of labour, because no worker is going to take the risk of selling their existing home, moving their family, settling their kids in a foreign school etc., in order to move to employment in another country, if they do not have even the guarantee of a degree of social insurance should they lose their job, having done so!  If we had worker owned and controlled social insurance funds, they would have no such national restrictions, but would bind workers together within them across the globe.

On the other hand, having accepted conservative macro-economic policies that favour small capital, Labour is only able to offer workers some modicum of comfort against the consequences of that, by focussing on welfarism. In this way they fall between two stools. The small capitalists and backward elements will not be convinced by the conservative economic policy, and will vote for the real thing in the shape of the Tories and UKIP, especially as they see the welfarist policies as being paid for out of their pocket, without any control over them. On the other, real workers themselves see no prospect of a dynamic industrial economy being reconstructed, and instead see their own wages frozen, and cut in real terms, as taxes continue to expand to cover the expansion of welfarism.

But, the irony is that the so called revolutionary organisations, ought to be able to make hay, and offer a real revolutionary alternative to workers under such conditions. Yet, the reality is that these micro-sects are themselves made up, and led by the same kind of sociological layers that make up the Westminster elite, and the chattering classes. Instead of a revolutionary alternative to social democracy, they offer up only left-wing Fabianism, dressed up with radical phrases, and packaged in Trotskyist verbiage.

For these organisations too have only a limited vision of the role that real workers are to play. For the labour leaders it is to vote periodically at elections, for the micro-sects, it is to throw themselves periodically over the barricades in strike actions out of which the sects hope to recruit a few more members, or even less periodically to come out on to the street in open revolution to displace the existing order, but only for long enough, of course, to ensure that the new “revolutionary” leadership is put in its place.

As Simon Clarke put it many years ago,

“For the working-class the Party is a means of mobilising and generalising its opposition to Capital and its State, and of building autonomous forms of collective organisation, while for the intellectual stratum it is a means of achieving power over capital and the state... As soon as the party has secured state power, by whatever means, it has fulfilled its positive role as far as the intellectual stratum is concerned. The latter's task is now to consolidate and exploit its position of power to secure the implementation of the Party's programme in the interests of the 'working class'. Once the Party has seized power, any opposition it encounters from the working class is immediately identified as sectional or factional opposition to the interests of the working class as a whole, the latter being identified with the Party as its self-conscious representative.”

(Crisis of Socialism Or Crisis Of the State?, in Capital & Class 42, Winter 1990) 

For the sects, the solution for the immediate problems of workers is for the capitalist state to nationalise their industries, and thereby maintain them in unproductive employment, much as the Stalinist state did. It thereby means other workers subsidising those workers through an ever increasing tax bill to maintain this burgeoning capitalist state. It is to continue to build an ever increasing welfare state as a means of providing opium for the pain of the people rather than dealing with the cause of that pain itself. And again, the consequence of that is to make those workers in employment bear an ever larger cost of that maintenance. As Clarke put it,

“The distinction between the Bolshevik and social democratic variants of state socialism should not be ignored, but it is more a matter of degree than of substance. The 'degeneration' of the Russian Revolution was not a matter of Lenin's intolerance, nor of Trotsky's militarism, nor of Stalin's personality, nor of the economic backwardness nor of the relatively small size of the Russian working class, nor of the autocratic character of the Russian State, nor of the embattled position of the revolutionary regime, although all these factors played their part in determining the extent of the degeneration. The degeneration was already inherent in the class character of the revolution which underlay the statist conception of socialism which it adopted as its project.” 

Socialists need to recognise socialism as something that is done by workers not done to them. It requires a perspective such as that advanced by Marx which focusses on the collective aspirations of workers to create something better, to lift their eyes to the sky, not down to the gutter. It is what is expressed in his writings on the Civilising Mission of Capital, in the Grundrisse. That is the opposite of characterising the working class by its most backward layers, still less by those that fall beneath it. Our task is to build a better world, not to have as the limit of our vision only the generalisation of the most moronic aspects of the current one.

Monday, 24 November 2014

Capital II, Chapter 20 - Part 27

9) A Retrospect to Adam Smith, Storch, and Ramsay 

Department I c 4000 + v 1000 + s 1000 = 6000

Department II c 2000 + v 500 + s 500 = 3000

The total value of the social product here is £9,000, made up C 6000 + V 1500 + S 1500. In other words, of society's total output, 6000 or ⅔ must be devoted simply to replacing the means of production. Only a third is left over to be consumed, and is equal to the total income received by workers and capitalists. At first glance, it seems impossible that if the value created by the whole of society in a social working day is only equal to £3,000, then £6,000 could go to replacing means of production. 

We've seen that this is quite possible, because two-thirds of the value of the national output was attributable, not to the value created in the current year, but to the value crated in previous years, and incorporated in the value of this year's output. This is a concept that Adam Smith failed to grasp, and an error that has continued into the writings of modern economists.

So, given simple reproduction, an equivalent amount of value to that transferred by constant capital, in the form of raw materials, wear and tear of machinery etc. to the value of current output, must also be set aside from current output to replace it. None of this value of output forms a revenue, or an income for anyone in the current period.  So, although it forms part of the total national output, it forms no part of the total national income.

Storch recognised this as essential without being able to prove it:

'It is clear that the value of the annual product is divided partly into capital and partly into profits, and that each one of these portions of the value of the annual product is regularly employed in buying the products which the nation needs both for the maintenance of its capital and for replenishing its consumption-fund... . The products which constitute the capital of a nation are not to be consumed.' (Storch, Considèrations sur la nature du revenu national Paris, 1824, pp. 134-35, 150.)” (p 438) 

Adam Smith, as we have seen, did not at all understand this reality. Smith, like Keynes, argued that National Output and National Income are identical. Everything that is produced and sold, thereby provides an income to someone. The firm selling the product takes its receipts and from them pays wages to its workers, profits to its owners, rent to its landlord, and interest to the money-capitalist who lent it money-capital.

The trouble is, of course, that those payments only account for a fraction of the total receipts the company obtains. A much larger amount of money has to be paid that does not come to any of these categories. It has to be paid, not as revenue, but simply to reproduce the circulating constant capital, and has to be kept in a reserve to cover the wear and tear of fixed capital. So, for example, a baker will have to pay out large sums to the miller who provided him with flour, the sugar producer, the energy supplier, and so on. They will have to set aside funds, that form revenue for no one, that cover the wear and tear of their machinery etc.

Now, its true, as Smith says, that the miller will take his receipts from the baker, and from them pay out wages, profits, rent and interest, but that in turn will leave him with a similar situation whereby that only accounts for a fraction of his receipts. He will also have to pay out sums of money that do not fall into these categories. He will have to pay out for the constant capital he has consumed too. So, he will have to pay the farmer for the wheat, the millwright for building or maintaining the mill, and so on. As Marx points out, no matter how far back you take this series, it will always be the case that output cannot be resolved simply into wages, profits, interest and rent because a portion – frequently the largest portion – of the value of output comprises the constant capital consumed.

All that National Income figures (which total up wages, profits, rent and interest) can show is the amount of new value created by labour in the current year. They will always omit the largest component of the value of output, which is the value of the circulating constant capital, in the form of the materials processed etc.

Sunday, 23 November 2014

The US Economy Is Accelerating

Normally, economic recoveries follow a pattern whereby the initial period of recovery is rapid, and then the pace of growth slows down. The US recovery did have the usual “V” shape, but it now seems that rather than the pace of recovery slowing, it is actually accelerating. The latest survey data from the Philadelphia Federal Reserve, known as the Philly Fed Index, showed a rise from 20.7 in October to 40.8 in November. The last time the index was at that level was in December 1993, but the jump in the index, to nearly double its previous reading, and more than double the 18.3 that analysts had been expecting, is unprecedented. In fact, its so huge that a number of analysts believe it must be wrong. Perhaps so, but its not the only data showing a strengthening US economy.

81% of US companies reporting profits have beaten expectations. That is the fastest pace in four years. US profits in the current earnings season are rising on average by around 12%. In addition, the index of leading indicators, produced by the Conference Board, rose sharply last month. The index gives a forward guide of future growth in the economy. Having risen strongly, by 0.7%, in September, the index rose even more strongly in October, by 0.9%, half as much again as the Reuters consensus estimate of 0.6%.

If the Philly Fed Index is correct, it implies growth in the Fourth Quarter of 2014, in the US, of 6.5%. That would be a sizeable rise, even compared with the 4.6% annualised growth rate, achieved in the second quarter. It would be half as much again as the 3.5% growth rate of the third quarter, and double current estimates of 3.2% for fourth quarter growth.

The report follows on several months during which employment growth has been strong and rising, in the US, and when the unemployment rate has been falling steadily, and is now close to the level considered by the Federal Reserve to constitute full employment. Labour shortages in some sectors have already been manifest, and that has gone along with rising wages in certain parts of the economy, though not generally. The Philly Fed's Employment Index more or less doubled in the last month.

But, not all the economic data shows such strong trends. According to Markit, US factory activity slowed last month. Its Purchasing Managers Index fell from 55.9 in the previous month to 54.7. The main reason seems to have been weakness in US exports. That follows naturally both from the fact that the EU economy has slowed considerably, and the dollar has risen sharply in value in recent months, making US exports less competitive. But, it should be born in mind that, as with all other developed economies, manufacturing today only forms a small part of total GDP. The majority of US GDP is accounted for by service industry.

As I've written previously, the US is likely to suffer the same three year cyclical slow down as other global economies - The three Year Cycle Kicks In.  That has already affected China, Latin America and the EU. The latter is also suffering from the self-imposed damage of austerity measures, as well as from the effects of the economic sanctions imposed on Russia, which barely affect the US economy, but impact heavily on European growth.

The three year cycle does not mean that economies necessarily go into recession, only that they suffer around four quarters of slower growth. Whether that means recession or not depends on the existing strength of economic growth. The UK and EU have not had the strength of economic growth that the US has enjoyed since 2009, because the US continued, during that period, to apply measures of Keynesian fiscal stimulus, whereas the UK, and parts of the EU, have damaged their economies with Hayeckian policies of austerity. The latter economies have, therefore, gone into the three year cycle in an already weakened condition. As I wrote a while ago, the effect of that in the UK is likely to be particularly sharp, because its apparent health is a mirage. The underlying weakness of the economy will, therefore, become more rapidly apparent.

The reason the US economy is accelerating, rather than slowing down, is that although it continued to apply measures of fiscal stimulus after 2009, it too has suffered from the same kind of political crisis that has affected Europe. In the US, the Tea Party, which represents the same kind of far right populism that is manifest in UKIP in Britain, in the FN in France, in the Five Star Movement in Italy and so on, has pushed opposition to fiscal intervention. In the same way that these right-wing parties in Europe have acted as a whip on traditional conservative parties, pushing them further into the adoption of policies of fiscal austerity, and other measures in support of the small capitalists they represent, so the Tea Party has forced the Republicans to adopt a similar fiscally conservative stance.

Republicans in Congress have been forced to oppose any further fiscal stimulus, and Republican controlled state governments have adopted similar positions undermining federal stimulus programmes. In Europe, a political crisis that flows from the failure of social democracy to push through the creation of a United State of Europe, which could apply a single fiscal policy across the union, has encouraged the growing conflict between nation states, and a resultant political crisis. That political crisis is behind the economic weakness of Europe. But, a similar political crisis exists in the US, and has caused similar economic weakness, as repeated conflicts have broken out over the Debt Ceiling, the Budget, and the Sequester, which have threatened to bring the US government to a halt, and have undermined the confidence of businesses and consumers to invest or spend.

The testament to the success of the Keynesian fiscal stimulus adopted after 2009, however, is that it seems to have put in place a sufficient economic basis for the economy to begin to grow, once those political crises have subsided. The effect of the Sequester, which took out a large amount of planned state spending from the start of 2013 has been accommodated within the overall growth of the US economy. A large part of the explanation for the acceleration of growth is that it is the delayed response to that stimulus, and the ending of the political uncertainty that the previous political crises inflicted. Its yet to be seen whether that may return as the Republicans threaten to respond to Obama's executive action over immigration, by using their financial power in Congress.

The underlying basis of this growth is the fact that the global economy continues to be going through the boom phase of a long wave cycle. Indeed, its only because of that fact that Keynesian fiscal stimulus has any possibility of working, by mobilising the huge reserves of available surplus value to cut short cyclical crises. It is an indication of the idiocy of conservative governments that in those conditions, and with interest rates at levels not seen in centuries, because of those reserves of surplus value, they not only fail to adopt such policies, but inflict unnecessary damage on their economies, and on the lives of millions of people by adopting austerian economic policies.

Saturday, 22 November 2014

Northern Soul Classics - Sweeter Than The Day Before - The Valentinos

The Womack Brothers with a bit of great Northern Soul, and some great Northern soul dancing of the type Stoke has been renowned for since the 1960's.

Friday, 21 November 2014

Lessons Of Rochester

On the basis of the numbers, UKIP are bound to lose Rochester at the General Election. They had a majority of only 3,000. The turnout was only 51%, which means that with a normal general election turnout of 70% plus, there are another 20,000 votes to be had. That is not only enough votes for the Tories to win the seat back, but it is enough votes for Labour to win the seat, with a 10,000 majority!

Its unlikely that in a General Election all of the UKIP votes would stay with them. Some of those votes will be disgruntled Tories, who have stuck with their sitting MP, but who will return to the Tory fold come the real election in 6 months time. There are numerous instances of such turnarounds. One of the examples always given to politics students is that of 1970's rising Labour MP Dick Taverne, who stood as an independent, because he thought Labour was moving too far Left.

Taverne had risen quickly in the ranks of the Wilson Governments of the 1960's, serving as a Home Office Minister and Financial Secretary to the Treasury. He fell out with his Lincoln CLP, and set up the Democratic Labour Association, under whose banner he contested the seat in a by-election in March 1973. He won the seat, and even managed to retain it in the General Election of February 1974, but at the October 1974 general election, he was thrown out. Despite all the media hype about the breaking of the mould of British politics, we've seen it all before – at least those of us older than 40 have.

Taverne was an outrider for the SDP, which split from Labour in 1981, and which he joined. They too, in the guise of the “Gang of Four” of Shirley Williams, Roy Jenkins, William Rodgers, and David Owen, had some sizeable by-election wins. But, in the blink of an eye, they were gone, merged with the Liberals into the Liberal Democrats. Remember them?

They were the outfit, who rather like UKIP were scrupulous about having no scruples when it came to opportunist politics, dropping policies like hot potatoes if they thought they might lose them votes, and pushing one policy in one constituency to gain votes, whilst arguing its direct opposite in another constituency, where it was seen to be electorally advantageous. They too were the outfit who were set to break the mould.

As recently as 2010, the media were orgasmic in their fawning over Nick Clegg, just as they have been over Nigel Farage. Farago was preceded by Cleggmania. They once all wanted to “agree with Nick”. Now Nick's bunch have lost their lustre, for the media. In Rochester, they could barely beat a dominatrix standing as an independent candidate. The Liberals have been reduced to a level where they have no more political significance than the SWP, or one of the other irrelevant sects. No wonder the media are scraping around trying to find the new story that will break the mould. Even UKIP seems to be becoming a bit stale for them, and their sights are shifting towards the Greens, and the SNP.

Some of UKIP's vote may have come from Labour, as tactical voting, with Labour voters voting UKIP to defeat the Tories. But, its also likely that the drop in Labour's share of the vote, is itself simply an indication of the fact that 20,000 voters who would normally vote in a general election, didn't bother in this by-election. Labour was not likely to win, so why bother. At a general Election, that is less likely to be the case. The General Election, whatever the media hype, and Farage's bluster will be between Labour and Tories, even the distraction of the Liberals has now been removed as their rotting corpse has been put firmly under ground. Under those conditions, the Labour voters will turn out, and any who had voted for UKIP will quickly return.

That is the other lesson. In the last three big by-elections, two were in Tory seats, and they lost both of them to UKIP, the third, in Middleton was in a Labour seat, and Labour held it comfortably. Despite all the media hype, Labour held Middleton, in the face of the Tory and Liberal vote collapsing to UKIP. Again the turnout was low, and in a general election, Labour's majority in the seat will be back at least to where it was at the last general election. UKIP continues to be a right-wing split from the Tories, just as the SDP were a right-wing split from Labour in the 1980's.

UKIP will no more break the mould of British politics than the SDP did, but like the SDP undermined the Labour vote, allowing the Tories in, in the 1980's, so UKIP will split the Tory vote next year.

The other lesson from Rochester is that MP's should ditch Twitter. The Internet is in general prone to encouraging people to say things they would not if they were saying them in public. That is why there are so many trolls out there. But, even for people writing things with the best of intentions, its easy for words to be misinterpreted, let alone misrepresented, unless and even if, you write reams of clarification. That is because no one can hear your tone of voice, or see your facial expression, which are vital parts of non verbal communication. Its one reason I never use Twitter, and why I've never understood why anyone would want to. The risk of saying something stupid, unintended, or just open to being misrepresented in an instantaneous tweet is simply to great.

Having said that, I'm a bit non-plussed about what all the fuss is about over Emily Thornberry's tweet. The main thing I take away from it, is what it says about the Westminster elite for whom the sight of England flags hanging from windows is “extraordinary”. For most of us, such a sight is not at all unusual. But, does the fact that its not unusual change the other underlying sentiment. On the estates where I have lived, there was nothing unusual about seeing such flags, but nor was it the case that every house was decked out with them. It was also not unusual to see houses groaning under the weight of Christmas lights and decorations, sometimes from as early as October.

But its equally true that most of the people who lived on those estates, not snobs, but ordinary hard working people, themselves saw the flags and the overdone decorations as a bit lowering of the tone. The trouble is that the Parliamentary Labour Party has become so stuffed full middle class professional politicos that they are susceptible to the charge of snobbery. A Dennis Skinner, or an Eric Heffer could have got away with Thornberry's tweet without any problem, because it would have simply been an example of what can be seen every day, of ordinary workers being prepared to poke fun at themselves, and the idiosyncrasies of some of their number.

But at also reflects something else. We don't know what the politics are of the person whose house was pictured in Thornberry's tweet. We don't know whether they were a UKIP voter or a voter for the “People Before Profit” candidate. We do know that the profile of UKIP voters, like the profile of BNP voters in the past, is one of people who hold some pretty reactionary ideas, and who may well be a part of that social strata that Marx described as the lumpenproletariat. The kind of picture often created that such elements represent the working-class is dangerous, because the other side of this, is to present a picture whereby the real working-class is then thought of as being the middle-class, rather as is done in the United States.

Those elements of these lower strata have never been the ones that have formed the back bone of the labour movement. On the contrary they have always been the ones used as a driving ram of reaction against it. The equation of poverty and socialist radicalism is a false one, and a dangerous one. When Labour MP, Chris Bryant, appeared on BBC News, therefore, and complained about Thornberry's tweet that “we should respect the voters”, he was completely wrong.

The idea of respecting the voters is one that electoralist parties must adopt, because for them politics is a commodity to be sold. They are only interested in winning as many votes as possible, so as to get elected, and necessarily that means elected on almost any basis. Such parties have to show respect to the voters, no matter how reactionary the views of those voters, no matter how ludicrous or unintelligent the views of those voters, for fear of upsetting them, and losing their vote. But how patronising to those voters is such an attitude?

The Labour Party should not respect the views of racists, and other bigots. They had no problem, in fact, in supporting the decision of the Home Secretary in banning such a person from entering the country last week. It doesn't mean we have to treat everyone with racist or bigoted views as being the same as a hard core fascist, but it does mean we have to tackle the reactionary ideas they have, and not simply pussy foot around the issue. But, that again reflects the problem that the Parliamentary Labour Party has with its social composition, and with trying to pander to liberal sentiments on the one hand without alienating workers scared of being left behind on the other. It is what has left Labour policy on immigration in a total mess for the last 50 years.

Labour should argue clearly against all immigration controls, but to do so would mean also arguing for policies that really tackle the problems of insufficient decent jobs, of lack of security, or inadequate housing provision, inadequate educational and health provision etc. You can't do that whilst simultaneously agreeing with the Tories on the need for policies of austerity. Those are also lessons Labour needs to learn from Rochester.

Financial Goldfish

Goldfish are reputed to have such short memories that each time they swim around the goldfish bowl they think to themselves, “Oh look a castle!” Its always puzzled me, however, how anyone knows what if anything is going through a goldfish's mind.

Humans are not supposed to have the kind of memory attributed to elephants, but they are supposed to have longer memories than that of a goldfish. In fact, its memory that accounts for a number of aspects of human behaviour. In Yoga, for example, adepts are encouraged to learn the difference between being hungry, and wanting to eat simply because they have the pleasant memory of food in their mind. Generals are often thought to be guilty of fighting the last battle. That is the memory of what happened previously, especially if you consider you made mistakes, imposes a powerful influence on determining how you will respond in current conditions, even if those conditions have changed.

This is supposed to also have a powerful affect on the way people behave in financial markets. If there has been a big financial crash, such as happened in 1929, 1962, 1974, 1987, 2000 and 2008, for example, this makes many investors fearful of risking their money again, for fear of losing it all. During such times, it is only the professional speculators, those who have a “contrarian” approach, such as espoused by people like Sir John Templeton, or Warren Buffet, “to be fearful when others are greedy, and greedy when others are fearful”, who use the opportunity of low prices to jump in, and buy up stocks ready for them to rise. In fact, not even that dogma is guaranteed either.

After the 1929 Wall Street Crash, the prices of many assets from shares to property could be bought at prices as little as 10% their previous figure. If you bought at those prices you would, as Templeton did, make money over the following period. But, in 1962 although if you bought at the bottom of the market, you would have made money in the following period, it would not have been stellar, and you would have been likely to lose it all again in the crash of 1974. Similarly, if you bought at the low point of 1974, your performance over the following period would not have been great either. On the other hand, if you began to buy in 1982, as the secular bull market began, you would have seen your investments rise steadily. Even though, the 1987 Stock Market Crash had the biggest single fall on a single day ever – 25% - in the following year, the falls were more than recovered. Had you bought at the bottom of the 1987 crash, you would have made a lot of money.

The reason share prices rose during that period was two fold. Firstly, the 1980's and 90's represented the Autumn and Winter phases of the long wave cycle. The Autumn phase is characterised by crises such as those that arose in the 1970's and early 1980's, characterised in Britain by the Miners Strikes, and other widespread industrial and political struggles. That Autumn phase ran from around 1974-87. By the mid 1980's, workers had largely been defeated. Falling wages increased the rate of profit, whereas in the previous period rising wages had squeezed profits. The period of slow economic activity that characterises the Autumn and Winter phase, led to the prices of many primary products falling. That acts to raise the rate of industrial profit. By the late 1980's, therefore, the global rate of profit was rising, and as new technologies based on the microchip, rapidly raised productivity and the rate of turnover of capital, this increased the rate of profit even further. That provided a basis for rising share prices.

But, that basis was nowhere near enough to justify the actual rises in share prices that occurred. The Dow Jones Index rose by 1300% between 1980 and 2000, a rise seven times greater than the growth of the US economy during that period. The additional ballooning of these markets was due to the fact that huge amounts of additional currency was thrown into circulation. The same thing caused property prices to rise massively during the 1980's. In Britain, property prices quadrupled between the late 1970's, and late 1980's. Property prices doubled between 1988-90, before dropping by 40% in the crash of 1990.

The combined effect of the stock market crashes of 2000 and 2008 does seem to have had an effect on ordinary investors. So called retail investors have largely stayed out of the market since 2008 – thereby missing out on the doubling and trebling referred to earlier. The fear they have of losing money seems to be one reason they have kept their money in cash deposits despite the fact they get no meaningful interest on their savings, or in the supposedly safe bonds.

Yet, the collapse of Northern Rock, along with the collapse of other banks across Europe in the last few years, the fact that people lost their deposits in banks in Cyprus and so on, should warn people that not even bank deposits are safe. Still less, at current prices, is money put into bonds, or bond funds provided by insurance companies and mutual funds, safe. Bonds are clearly in a bubble, as is set out in this Money Morning article, yet when it comes to examining the past in that regard people seem to be ignoring the lesson of recent history. 

As the article describes, Apple have just issued a Eurobond for €2.8 bn, which it is borrowing at interest rates as low as 1.08%. Its not that Apple needs the money. It already sits on a huge pile of cash. Although, Apple's profit margin has fallen from over 40% a few years ago to around 35% today, that is still a significant profit margin. As I've set out elsewhere, a firm's profit margin is always less than its annual rate of profit, because its annual rate of profit is increased by the number of times its advanced capital turns over during the year, whilst the profit margin is based on a single turnover of the laid out capital.

Apple wants the money simply because it can borrow it at this low level, and can then use it, not for productive investment, but to buy back its own shares, and thereby boost the stock price, and flatter its future earnings per share figures. But, it does illustrate a point, if companies like Apple, and there are many more doing the same thing, are taking advantage to borrow at these low rates of interest, why is not the capitalist state doing the same thing?

In fact, it comes down to the point made earlier about memory, and fighting the last war. In the 1930's, economists believed that budgets had to be balanced. The experience of the Depression, led, after WWII to the adoption of Keynesian economic policies. They seemed to work. Each time a recession started, the economy received a dose of fiscal stimulus, and the recession was cut short, and the boom continued. But, in the 1970's, the Keynesian medicine stopped being so effective, and side effects in the shape of inflation appeared. The memory of the last battle led economists and governments to keep using the same policy long after it had stopped being effective. Only by the late 1970's, did they begin to look for a different strategy.

Having found it in an application of Hayeckian austerity, followed by Chicago School Monetary stimulus, they have continued to use that strategy ever since, which is why today, we see Osborne and company proposing policies of austerity that crater aggregate demand in the economy, combined with throwing more and more liquidity into the system, encouraging individuals to take on more personal debt, in an attempt to replace the aggregate demand they have taken out of it via fiscal policy. They are bound by the memory of the last battle of the failure of Keynesian stimulus in the 1970's, and without any kind of real understanding of the way capitalist economies actually work, that Marxist theory provides, they can only pull out the old play book from which to draw their current strategy.

In fact, the current conditions are not those that led to the failure of Keynesian solutions in the 1970's, but the conditions that led to their success in the 1950's and 60's! Britain had a debt to GDP ratio of 250% after WWII, compared with around 70% today, yet it engaged in large scale government spending to nationalise and recapitalise staple industries, to invest in infrastructure, and to develop the Welfare State.  Despite all that spending, the deficit and debt fell, because the economy grew, people were put to work and tax revenues rose sharply.  That is why those policies when they were adopted in 2009 worked. Its why everywhere they have continued to be applied, including in the US, they continued to work, and why everywhere they were dropped, such as in the UK and Europe, after 2010, the economies have sunk back into recession, despite the huge amounts of monetary stimulus, and the creation of the financial bubbles, which caused the financial crisis of 2008, and which are about to create an even bigger financial crisis.

But, what is even more surprising is that although many ordinary people have been frightened away from buying shares – and quite rightly because when the financial crash comes those share prices will collapse too – they do not seem to have had the same response to property. In the US and UK, there seems to be some kind of intractable mindset that sees property as somehow immune to all the laws of economics and even mathematics. When I was looking at property to buy in Spain a couple of years ago, I looked at a house being sold by some British people, who repeated the mantra to me that “prices will recover again”. I remember thinking to myself at the time, “Not in my lifetime they won't”. Sure enough, in the time since then, prices have fallen even further, and Idealista, the big Spanish real estate agency, continues to forecast prices falling by another 15%, with only about 12% of the properties put up for disposal by the Spanish banks last year, having been sold.  The particular house has been reduced in price, and still hasn't been sold.

A recent New York Times article by Bethany McClean illustrated the point that already people were beginning to use higher property prices once more to borrow increasing amounts of money to bolster their lifestyle.

To watch the video.

 In the last couple of years, in the US, we have seen student debt go over $1 trillion now exceeding the amount of credit card debt. We have also seen the same kind of practices that led to the 2008 crisis being repeated. This time we have had people being offered sub-prime car loans, that are then packaged up into derivatives.

All in all, it seems that many people are doomed to repeat the mistakes of 2008, and other financial and property crashes. They seem to be destined, like the goldfish to witness, as though for the first time, that property prices can go down very sharply, along with the prices of other such assets.

Thursday, 20 November 2014

Cameron Shows Just How Out Of Touch He Is

During Wednesday's Prime Minister's Questions, David Cameron showed again just how removed he and the people of his class are from the reality of the vast majority of people. Besides the fact, that Cameron has shown over a long period that he cannot answer even the questions put to him by other parliamentarians, his performance has become that of the court jester, rather than a serious politician. Its just one indication of what contempt people like Cameron have for the democratic process, or for the electorate. But, the most telling comment was one of the usual throw away remarks he cast in the direction of Ed Miliband.

According to Cameron, in a clash, between Miliband and Myleene Klass, earlier in the week, “Klass wiped the floor with him”. How exactly had she done this? The clash occurred on a TV programme, where Klass had attacked Miliband for Labour's proposal to introduce a mansion tax, on properties priced over £2 million. According to Klass, and given that Cameron believes that she “wiped the floor” with Miliband, we must assume he agrees with these sentiments, in many parts of London, £2 million would be only enough to buy a property “like a garage”.

Now, I have myself pointed out just how ridiculously over priced properties are in London, but anyone who believes that the kind of property you can buy, even in London, with £2 million, is only “like a garage”, is telling you more about themselves, than they are telling you about the London property market. There is no case of a garage being sold, even in the most expensive parts of London, for £2 million. Having said that, there was a case of a garage, with planning permission, in Chelsea, selling recently for £550,000. 

The average price of a detached house in Greater London is £400,000, only a fifth of the £2 million threshold for the tax. Moreover, its estimated that, in the whole of the UK, the total number of properties that would fall within the £2 million limit comes to between 58,000 to 110,000 properties, out of the total 25 million properties in the UK. Put another way, it comes to around 0.5% of the total number of UK properties. If Myleene thinks that £2 million can only buy you what she would consider a garage, its quite clear what Klass perspective she is representing! That Cameron agrees with her, just confirms that he lives the life of a toff.

According to Klass, the tax would hit a load of grannies who have lived in these garage mansions for decades. Not true. According to a number of surveys, two-thirds of the people, who live in the affected properties, have lived there for less than ten years! But, even were it true that some of the people living in these mansions were grannies, who had lived there for years, so what? This is not some equivalent situation to say the bedroom tax, which Cameron is happy to inflict on poor people, and about which his Klass ally seems to be less concerned.

The bedroom tax is imposed on people who start with no money, and who are being taxed because the housing policies of successive governments over the last 30 years has failed to provide sufficient social housing, leaving a shortage of adequate provision. They are being taxed, because, even if they could manage with fewer bedrooms – and many can't for various reasons – councils simply have no smaller properties to move them to! Many of the people being penalised with the bedroom tax, are people who are suffering from the low wage economy created by Thatcher in the 1980's, and perpetuated by her heirs, that leaves millions of workers dependent upon in work benefits, like Housing Benefit, to make up the totally inadequate wages paid to them, by cheapskate employers.

But, those with £2 million properties are in no such position. Even in London, £2 million would buy you four average priced detached houses, thereby avoiding the need to pay the tax. Or just buy one of those properties, leaving you in the rather enviable position of having £1.6 million left over to spend as you like. How many people facing having to pay the bedroom tax would love to be in that position? In fact, in many parts of the country, the £400,000 for a detached house in London, would indeed buy you something approaching a mansion. Again, how many of those facing the bedroom tax would love to have the dilemma of whether to buy an average detached house in London, or a £400,000 mansion in Staffordshire? Again, it shows how removed Cameron and his Klass are from the lives of ordinary people.