Oil Price. Good For The Economy, Terrible For Financial Markets - Part 8

In Part 7, it was indicated how a fall in the price of oil, which reflects a reduction in the amount of social labour-time required for its production, thereby also releases both labour and capital from that production, to be used for other purposes. But, a rise in productivity in oil production, just as with a rise in productivity in the production of any other commodity, may not result in labour and capital actually being employed in other production. It depends, upon whether there is sufficient demand for what is already being produced, to justify simply employing the existing quantity of capital and labour to expand its production.

For example, in the 1930's, productivity in the car industry increased substantially as new techniques and technologies were introduced as part of the Taylorist drive for scientific management, alongside the introduction of Fordist mass production techniques. As described above, less labour-time was required to produce any given quantity of cars, so that both labour and capital was thereby released. But, this did not result in labour and capital moving to the production of some other form of commodity. Instead, the total mass and value of capital employed in motor car production increased rather than shrank.

The reason for this was that very few people at that time had cars. They were the preserve of the rich. However, as productivity in motor car production rose, this meant that the value of each motor car fell, because each car required less labour-time for its production. As the value of each car fell, so its market price fell, and this meant that it came within the reach of wider social layers of consumers. Members of the middle class were able to buy cars, so demand for cars rose. Instead of the released labour and capital, resulting from the higher productivity, going into some other type of production, it was simply employed in motor car production to meet this additional demand.

If we consider some other type of commodity, however, this may not be the case. Looking at Marx's comments earlier in relation to agriculture that is most clear. For the vast majority of Man's history on the planet, the problem was to be able to produce enough food. Primitive tribes of humans, which existed on the basis of hunting and gathering, continually lived on the edge of existence, whereby they might die out, as a result of not being able to obtain sufficient food. Only when human societies passed to the stage of civilisation, with the development of settled agriculture, about 10,000 years ago, does this begin to change, and the potential for producing a surplus of food begin to arise.

Because, generally speaking, humans have a limit to how much food they can consume, let alone how much they choose to consume rather than to consume some other product, when food production reaches this basic limit, any rise in agricultural productivity results not in a further expansion of food production, but in labour and means of production being used for the production of other products. 

When the agricultural revolution occurred in Britain, in the 18th century, therefore, it meant that, even allowing for the increase in population, the amount of food required could be produced with a fraction of the labour previously employed. Part of that revolution, which caused such a sharp rise in productivity, and release of labour, was the very fact of throwing the peasant direct producers off their lands, by the process of outright land thefts by the aristocracy, and the legalised thefts imposed via the Enclosure Acts.

By this process, thousands of inefficient small producers, who essentially only produced the food required for their own families, were replaced by large efficient farms, which, due to their greater efficiency, were able to produce all the food required, with a fraction of the labour, thereby releasing that labour, which flooded into the towns, where it could be exploited by industrial capital. This same process has been seen over the last two or three decades in China, and can be seen also in Africa.

A look at Britain, shows the extent to which this rise in social productivity can cause the amount of labour and capital required, in any particular sphere, to fall significantly, where the requirements for consumption have largely been fulfilled. Between 1851 and 1921, the agricultural workforce fell from 1.7 million to under 1 million; the current figure being below 200,000, or less than 1% of the total workforce. That is not to say, that this might not change. Marx wrote about the overproduction of yarn that arose from a massive rise in productivity caused by the introduction of spinning machines, so that far more was produced than could be consumed given the conditions of demand for yarn at the time.

“(When spinning-machines were invented, there was over-production of yarn in relation to weaving. This disproportion disappeared when mechanical looms were introduced into weaving.)”

(TOSV2)

In other words, the overproduction of yarn arose because the potential for weaving it into cloth was limited by the state of technology in weaving at the time. To have absorbed all of the yarn, in weaving, would have required a huge expansion of weaving capital, the building of additional factories, and the employment of huge numbers of hand loom weavers, whose wages would then have soared due to the sharp rise in demand for their labour-power. But, even after this had happened, it would have been impossible to have sold all the finished cloth, because its price would have been too high, despite the much lower value of yarn, because the cost of weaving it would have been prohibitive. Only when power looms were introduced, that replaced the hand loom weavers, did this cost of weaving the yarn fall enough that it was possible to produce cloth in vast quantities, at a much lower price, that could then be sold profitably, and which thereby not only was able to soak up the previous overproduction of yarn, but required even more of it!

The fact that the value of a commodity falls, therefore, as a result of a huge rise in productivity, does not mean that the increased mass of commodities can be absorbed by the market, even at much lower prices. As Marx puts it,

“The same value can be embodied in very different quantities [of commodities]. But the use-value—consumption—depends not on value, but on the quantity. It is quite unintelligible why I should buy six knives because I can get them for the same price that I previously paid for one.”

(TOSV 3, Chapter 20)

The demand for agricultural products, therefore, might rise substantially if they become demanded for other reasons, than simply as food. In other words, as with the situation with yarn, if the conditions of demand change. For example, with oil prices at very high levels, large areas of land, were given over to the production of corn and other crops to be used as feedstock for the production of ethanol. The demand for corn as food might be limited, at prices that enable profits to be made, which thereby limits the extent to which capital and labour are employed in its production, but if that demand is supplemented by the use of corn for other purposes, that situation is changed. 

In a similar way, the demand for oil rose after WWII, because of the development of the petrochemicals industry, as oil is the raw material used for a range of plastics, fertiliser and so on. The growth of new markets, such as in China, has also created new conditions of demand, over the last 30 years, both for use in industry, as well as a consumer good, required as fuel for the massively growing Chinese car market, which is now the largest in the world. As a result, although productivity in the oil industry rose, this continued rise in the demand for oil meant that the output of oil also had to rise, and so absolutely more capital and labour was therefore, required for its production, even as the relative quantities declined.

The rise in productivity in oil production, unlike in agriculture, was not, therefore, marked by a growing absolute release of capital and labour, from its production, to other forms of production, during this period. It was instead marked only by a relative release of capital and labour, as output continued to rise sharply. In fact, between 2007 and 2013, employment in oil and gas extraction in the US rose by 40%. According to the ILO, global employment in oil production peaked only in the last decade at around 4 million. Moreover, although from the 1980's onwards, in response to previous oil price rises, a considerable rise in the efficiency of oil use took place, (oil consumption rose by only a seventh of the rise in global GDP between 1980 and the early 2000's) the increase in demand for oil after the start of the new long wave boom in 1999, was such that demand continued to outstrip the rise in supply, so that global oil prices rose sharply.

As set out earlier, the current fall in price reflects the fact that this situation has now ended. Although global oil demand continues to rise, so the fall in price cannot be said to be due to “underconsumption”, the rise in the supply of oil, has now grown so much that it exceeds that demand, i.e. as with Marx's comment about the supply of yarn, there is an overproduction. Market prices, are falling not just because the value of a barrel of oil has fallen, due to higher levels of productivity, but because there is over-supply, and so the market price is set at a level below the general price of production. The consequence is then that the oil producers whose individual price of production is higher than this market price, will make losses, and some will go out of business, thereby removing the overproduction.

I will examine this further in Part 9

Back To Part 7

Forward To Part 9

Northern Soul Classics - I'll Always Need You - Dean Courtney

Back in the 1970's, when everybody put all their collection on cassette tapes, long before even the Sony Walkman, let alone the iPod, you started to have sequences of songs imprinted on to your consciousness.  Hear one, and you necessarily began, in your head to hear the next on your most played tape.  Earlier, in the week, I played "Midnight Is The Hour" by Demis Roussos, a disco classic from the time, and it automatically brought to mind this classic bit of Northern from Dean Courtney, which followed it on a tape provided for me back then, by my good friend Keith Beardmore.  So here it is.

Friday Night Disco - I Found Lovin' - The Fatback Band

Playing "Midnight is The Time", earlier in the week made me think that back in the 1970's and 80's, there was lots of stuff that was not Northern Soul, but which found its way on to tapes, and various discos, as well as there being a cross over.  So, I thought I'd start another series of such disco sounds from the time.  This is a bit late for the period I'm thinking about, but a great track from the Fatback Band.

Labour's Immigration Policy Is A Mess - Part 6

Labour's Immigration Policy, since WWII, has rested on this inadequate basis set out on Part 5. As a parliamentarist party, whose main concern is to garner votes, so as to get MP's elected, it is necessarily opportunist, because the advocacy of principle, the idea that it is more important to fight for ideas, and to change the nature of the working-class by so doing, must always be secondary to the need to win votes in the here and now, for such a party.

If a large number of workers, and so potential voters, hold racist, bigoted views, such a party cannot confront those views, because, in the here and now, that would mean to risk losing potential votes. That, in fact is what was behind the party leadership's alarm over the Emily Thornberry tweet.  In fact, not only does it mean it is impossible to adequately confront those views, but it means that they must essentially be denied to exist, other than for a small minority. They must be apologised for, and excused as being based really on other factors, such as a fear of losing jobs, a lack of housing and other social services that have absolutely nothing to do with immigration, and everything to do with the inadequacy of capitalism to be able to provide a decent stable standard of living for workers, and the deliberate policies of austerity imposed by conservative governments, and accepted as inevitable by Labour.

The answer to workers very real fears about a lack of decent jobs, houses, schools, hospitals and so on, is not to pander to racist prejudices over immigration, as its current announcements have done, but to stop trying to out-austerity the Liberal-Tories, and to start engaging in a real struggle against those policies of austerity, and to start proposing to build schools, houses, hospitals and so on taking advantage of the historically low interest rates that exist to be able to do so.

If its good enough for George Osborne to encourage more and more people to go into more and more debt, simply to buy massively overpriced houses, using these low interest rates, and the bribes he is offering them, if it is good enough for Apple, and other huge corporations, to borrow at these low interest rates, when they already have tens of billions of dollars of cash, simply in order to speculate, it is idiotic for any government not to use this once in a lifetime opportunity to borrow at these rates, to be able to build and invest in the social capital required to develop a modern, efficient, competitive economy that also provides the mass of the people with a decent standard of living!

Yet Labour's timidity in tackling racism in relation to immigration is only outdone by its timidity in proposing such a rational economic policy in the face of conservative opposition. It is the same timidity that prevents social-democracy from tackling the bigotry of religion in the face of conservative opposition, and which again leads to apologism for that religion, once again describing those that act consistently according to its nature as merely a few extremists, acting aberrantly.

The failure to wage an all-out ideological war against conservatism, for fear of losing votes, from those workers who themselves remain dominated by these conservative ideas, is what causes social-democracy instead to pander to them, and to try to establish a bureaucratic compromise. In fact, the Conservative Government that ran from 1951 to 1964, itself necessarily closer to social-democracy than conservatism, given the environment in which it operated, had been itself opposed to immigration controls, saying they were “unnecessary and divisive.”.

The Tories, during the 1950's period of “Buttskillism” had to adopt social-democratic positions, both in order to get elected, and under pressure from the needs of the dominant sections of British capital at the time. But, this same requirement to win working-class votes imposed on it also a requirement itself to respond to the growing opposition to immigration within sections of the working-class. The Tories went from a policy of open immigration, and a belief that controls were unnecessary to the introduction of the 1962 Immigration Laws.

When Labour came into office in 1964, facing a similar growing level of racist opposition to immigration amongst workers, rather than tackle that racism, it again accommodated to it. Instead of repealing the 1962 Act, it introduced amendments to it, which

“...reduced the numbers of employment vouchers, erasing the unskilled category and cutting the numbers of skilled vouchers to 8,500. It also tightened up the regulations on students, dependants and visitors, brought in health checks for new migrants, gave the Home Secretary the power to repatriate migrants, and introduced police powers over the registration process.”

(National Archives.)

It started a process, whereby a series of further immigration laws were introduced by Labour during the 1960's that accommodated to racist prejudices, and which quite contrary to the ideas of Curran and others upon which the Party had been founded, sought to associate the interests of British workers with British capital, and accepted the idea that the problems of British workers could be placed at the feet of foreign workers rather than British capital. 

The reason that Labour can never tackle racism, and develop an adequate policy in relation to immigration is, therefore, quite clear. It is the same reason that it has not been able to tackle other manifestations of nationalism, for example in relation to conservative opposition to the EU. That is that in order to develop such an adequate position, it would both have to tackle, head on, the racist conservative views held by a large section of the working-class, and thereby risk, in the short-term, losing large numbers of those working-class votes, and because such an approach would require a confrontation with large sections of capital itself, on the basis of the argument that the problem lies with capital, not with foreign workers.

As I will explore next, the consequence of this, in relation to immigration, as with other aspects of nationalism, is that in place of such an ideological struggle, what we get is a bureaucratic manoeuvre.

Back To Part 5

Forward To Part 7

Capital II, Chapter 20 - Part 48

3) Results 

“If — all other things, and not only the scale of production, but above all the productivity of labour, remaining the same — a greater part of the fixed element of II c expires than did the year before, and hence a greater part must be renewed in kind, then that part of the fixed capital which is as yet only on the way to its demise and is to be replaced meanwhile in money until its day of expiry, must shrink in the same proportion, inasmuch as it was assumed that the sum (and the sum of the value) of the fixed part of capital functioning in II remains the same.” (p 471)

But, this leads to the series of problems listed above.

“If the greater part of commodity-capital I consists of elements of the fixed capital of II c, then a correspondingly smaller portion consists of circulating component parts of II c, because the total production of I for II c remains unchanged. If one of these parts increases the other decreases, and vice versa. On the other hand the total production of class II also retains the same volume. But how is this possible if its raw materials, semi-finished products, and auxiliary materials (i.e., the circulating elements of constant capital II) decrease?” (p 471)

Secondly, the greater the proportion of fixed capital to be physically replaced, the greater the amount of money that flows to Department 1 to purchase it, i.e. as means of payment rather than as means of circulation. But, then this greater quantity of money in the hands of Department 1 capitalists is unable to find an increased quantity of Department 2 consumer goods to buy with it. On the contrary, the more Department 2 spends on fixed capital the less it has to spend on circulating capital, and so the less it is able to increase or even sustain its level of output.

Department 1 then has an excess of money over the available consumer goods. It can overcome this by buying imported consumer goods. As stated previously, however, if the expenditure on fixed capital falls, this means that less money-capital is advanced by Department 2, whilst the value of wear and tear on fixed capital, continues to accumulate in the depreciation fund. Department 1 is then unable to sell all of its output.

“There would be a crisis — a crisis of over-production — in spite of reproduction on an unchanging scale.”(p 472)

In contrast to the previous situation, one way to resolve this would be for Department 1 to export its surplus production. Yet, as Marx points out, all this does is to extend the problem to a wider international sphere, and thereby create the conditions for a national crisis to become an international crisis.

“Such surplus is not an evil in itself, but an advantage; however it is an evil under capitalist production.” (p 472)

Once capitalism is abolished, the problem does not disappear, Marx says, but the means of dealing with it changes. If more fixed capital has to be physically replaced in one year, less will need to be replaced in the next. To maintain production at a stable level, the quantities of circulating capital have to be maintained. The solution to this problem then simply becomes the production each year of relative surpluses.

“There must be on the one hand a certain quantity of fixed capital produced in excess of that which is directly required; on the other hand, and particularly, there must be a supply of raw materials, etc., in excess of the direct annual requirements (this applies especially to means of subsistence). This sort of over-production is tantamount to control by society over the material means of its own reproduction. But within capitalist society it is an element of anarchy.” (p 473)

Back To Part 47

Forward To Part 49

UK House Prices To Drop 50%?

I nearly bought a house last week, but according to Paul Hodges, Chairman of IeC, and an expert in the economic impact of demographics, in an interview in Moneyweek, it would have been a big mistake.  Hodges believes that property in the UK is vastly over priced, and should fall by 50%. He believes the price falls have already begun, including in London.

I agree with him that property prices are vastly inflated, and should fall, and are falling.  According to Rightmove, even asking prices for houses fell by 3.3%, on the month, before Christmas, the biggest monthly fall on record.  In fact, as I've written previously, I think that prices are likely to fall more like 80% eventually, because the 50% figure is only what is required on average to restore prices to the long-term average relation between prices and average earnings, and prices never simply drop to the average level.  They overshoot to the downside as much as they have overshot to the upside.  A look at what is happening with oil prices demonstrates that.

Its one of the reasons, in the end I did not buy the house I was looking at.  It illustrates the dilemma posed by deflation.  Having kept a close watch on what property prices are doing locally I am acutely aware that whatever all the media hype might claim, the selling prices of houses here have fallen by around 30%, since 2010.  I know that from the fact of detailed studies of sold properties in the area, and of specific knowledge of some of the properties sold.  For example, my own house, that I sold for £150,000, at the start of 2010, can now be bought for £110,000; the house next door but one to where I live now was sold at the start of 2010 for £500,000, and the more or less identical semi-detached house connected to it, sold at the end of 2013 for £340,000.

The house I was considering buying was a 20 year old, large, detached four-bedroom property with en suite, and all the other modern facilities.  It had been up for sale for £195,000 a few months ago, and had now been reduced to £165,000.  The dilemma was to simply take into consideration the fact that the price had already dropped by 15%, and on the basis of current market prices seemed to offer reasonable value, or to take into consideration the fact that if prices do drop by even just 50%, to get back to fair value, that would mean losing £80,000, in short order.  This is the situation that arises where prices get into a continuous falling sequence, because buyers never want to buy, even at lower prices, on the basis that next week, prices will be even lower still.

In fact, as I've been having another round of looking at potential houses to buy, I've noticed that eventually there do seem to be a significant number of large new housing developments occurring around the area.  Again, rather like the situation where high oil prices eventually led to an increase in oil supplies that then caused a glut, which has caused oil prices to drop 60%, this noticeable increase in building could be a sign that property prices, like oil prices, are about to crash.  Already, I've noticed that builders are cutting their prices by around 20%, something which is usually a last resort, after they have tried other methods to shift stock, such as part-exchanges, and other offers.

But, the experience highlighted another fact.  The house I had been looking at to buy, even at that price, had previously been privately rented.  It shows the extent that the property market has been distorted by the government's "Help To Buy" scam, alongside the effect of low interest rates in promoting the development of "Buy To Let" landlords.

In more normal times, money is lent to businesses that intend to use it to actually produce things. They use the money-capital to buy factories, machines and employ workers to make things that people want.  The business makes a profit from the activity, and out of the profit pays interest to the money lender.  But, increasingly money is not lent for that purpose.  Increasingly, the money made as profits from production, or even just the money that swirls around in circulation, is used not to buy capital but simply for speculation.

I was watching an episode of the series "The Super Rich and Us", recently, which featured one of these "Buy To Let" merchants who had progressed on to organising seminars to encourage hundreds of other people to borrow money to become buy to let landlords.  It was an indication of just how much money is going into such speculation.  It creates not one bit of additional wealth, but what it does is to keep inflated already massively inflated property prices, but in so doing only creates a condition whereby the bursting of that bubble, when it does arise, will be even bigger than it would otherwise have been.

What is being seen is a similar thing to what has happened in the bond market.  Normally, Buy to Let landlords would have concentrated on buying cheaper properties, which they could more easily rent out to obtain a steady income, particularly if they obtained the rent or Housing Benefit directly from the local council rather than the tenant.  This is rather like bond investors, who would tend to buy the safer bonds issued by countries like the US, UK and Germany, which pay lower interest rates, but on which you can be pretty sure you will get your money back.

But, "Help To Buy" has meant that people who really could not afford to buy a house, have been subsidised to do so, as happened with the similar sub-prime mortgages in the US, that led to the 2008 financial crash.  That together with the demand for these cheaper houses from Buy To Let landlords, has both reduced the availability of such houses in the market, and to push up their prices relative to higher priced properties, causing a compression of prices in that sector of the market.  It means the potential rental return for Buy To Let landlords is thereby reduced, because although the rent is not increased, and may well be falling as a result of the effect of the reduction in Housing Benefit, the price they have to pay for the house has risen, so the yield on their investment drops.

That is the same as the fall in yields that bond investors have seen on safe haven bonds, which has then resulted in a search for yield, which causes investors to have to then invest in ever more risky bonds.  It is what has led to the increasing share of junk bonds to finance energy production in the US, which are now at risk of default, as oil prices drop, and energy firms are in danger of going bust. But, in the UK housing market, it means that Buy To Let landlords are encouraged to have to move out to more expensive properties, such as the one I was looking at, and for which they have to then obtain higher rents to justify their investment.  As with junk bonds, it is a highly illiquid market, which means that when the owners of the bonds or the property come to sell, there are no ready buyers, especially when, in the case of property, it is large numbers of houses they seek to sell in one go.

As Warren Buffett advises in relation to investment - "If you don't see anything that is a bargain that is worth buying, you don't have to buy."  On that basis, I'm happy to keep renting for a while longer, because there are an increasing number of houses coming up for sale, and each week they seem to keep getting cheaper!

US Retail Sales and False Profits - Part 2 of 9

Say's Law assumes that income and expenditure must always be equal, because income is what every seller obtains from selling their commodity – including workers who sell their commodity, labour-power – and its assumed the only purpose of selling a commodity is to buy another, or several others of an equal amount of value. In describing this view, Marx quotes Ricardo,

“... No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person.” 

(TOSV2 p 493-4)

and,

“Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected” 

(TOSV2 p 501)

In other words, it assumes that the market operates on the same basis that it did when all such exchanges took place by barter. Individual commodity owners take their commodity to market, for the sole purpose of obtaining some other commodity or set of commodities of equal value. In that case, every sale must be simultaneously a purchase, because commodities are only exchanged for other commodities. What people obtain as income, therefore, is equal to what they sell, and what they sell is equal to what other people spend, so, in total, income must equal expenditure.

Economists like Smith and Ricardo, had never experienced the kind of crisis of overproduction that arose after 1825, Marx says, and so their theory never had to account for it. The only crises they had seen, Marx says, were the various financial crises that occurred in the previous century, resulting from the fact that banks printed their own bank notes in excess of their capital, and lent money in excess, which caused speculation such as that which arose with the South Sea Bubble, Tulipmania, John Law's Mississippi Scheme and so on.

As a result, these economists, and their followers, believed that there could be no crisis of overproduction, and when their followers came to explain these crises, when they did arise, they were, therefore, led to the argument that it was caused not by overproduction, but by underconsumption. So, for example, when Britain overproduced textiles, which it shipped to China, it was argued that the glut of these textiles on the Chinese market, was not a result of overproduction by British capitalists, but underconsumption by Chinese consumers. The reason for that underconsumption was then that China was not producing enough of the commodities that Britain required, which could then be exchanged for these textiles.

If we relate this back to the US Retail Sales data then, its clear why this fall in the value of sales is understood as being the consequence of reduced demand. The other option, that demand might actually have remained constant, or even risen, whilst the prices of commodities, in aggregate, fell is rejected, because, according to Say's Law, any reduction in prices, caused by increased supply, must be compensated, at an aggregate level, by the resultant increase in demand, i.e. as the price of individual commodity units falls, with a rise in supply, so demand rises, meaning the total expenditure remains the same, and incomes and expenditure are, therefore, the same. The fall in the prices of oil and copper, are similarly viewed in this way, so that when the price of copper fell, this was interpreted as meaning that the demand for copper must be falling, which suggests a slowing of economic activity, falling profits, and so shares sold off.

In Part 3, I will examine why Say's Law is wrong, and why, therefore, the understanding of the falling prices, and lower US Retail Sales data is also wrong.

Back To Part 1

US Data Confirms Conjunctural Shift To Long Wave Summer

Some time ago, I wrote that the Long wave boom that began in 1999, was shifting to its Summer phase, a shift that occurred around 2012.

I wrote at the time that it would be signalled by the sharp rise in primary product prices coming to a halt, as those high prices brought large new supplies on stream.  That part of the analysis has been shown to be correct as oil prices, and other primary product prices have fallen, as supply has risen sharply.

I also wrote at the time that this shift would be signalled by a slowdown in technological innovation, which would have several consequences.  Some time ago, in illustrating this shift, and one of the consequences of this slow down in innovation, I pointed to Apple.  It had in the previous phase been a bell-weather of technological development, being responsible for a range of new products.  I pointed out that, increasingly Apple's new product launches were nothing more than revamped versions of its existing products.  The consequence would be for new launches to cannibalise existing demand for products, especially as basically the same product was sold in cheaper and more expensive versions.  That also happened, and I pointed out that a consequence was that Apple was having to reduce its profit margins to be able to continue to sell in the large volumes it required.

The other consequence of this slow down in technological innovation, I pointed out was that productivity growth would slow down, and this would mean that unit costs would tend to rise, and profit margins would again start to be squeezed.  The only solution to both these problems is for capital to invest in additional productive-capital.  It means it must begin to invest in additional research and development to come up with really new products to sell, rather than merely superficial changes to existing products, and to create new production techniques to raise productivity.  In the first instance, as marx describes of this phase of the cycle, capital must invest in additional productive capacity, as each individual capital seeks to reduce unit costs by producing on a larger scale, and capturing or at least defending market share from its competitors.

The economic data released in the US in the last hour confirms this analysis once more.  The data shows that durable goods output december was down sharply, and the data for November, was also revised down.  Durable goods, here is a proxy for investment in capital.  In part, this reduction is the consequence as I had predicted a few months ago, of the three year cycle, which has already caused a slow down in economic activity in China, the EU, UK and elsewhere.  The data released at a company level also confirms the analysis.

Profit figures from a range of companies from Caterpillar to Microsoft show profit growth slowing, even where revenues have continued to increase.  In other words, it shows that profit margins are getting squeezed.  At this stage of the long wave cycle, the consequence of this is always to require that an increased proportion of profits goes to investment and capital accumulation, and a smaller proportion to the payment of dividends, rents and so on.  The demand for loanable money-capital thereby rises, whilst its supply declines, pushing interest rates and yields higher.

Its no surprise, therefore, that the US stock market has shown a decline of over 300 points in the DOW futures ahead of the market open.  It is the kind of response I have analysed in the series on the long wave, as well as in the series on fictitious capital.

UK Growth Continues To Slow Sharply

At the beginning of October last year, I set out why the UK economy was about to slow down sharply, despite all of the hype that the Liberal-Tories were coming out with about how their austerity measures had performed an economic miracle.   The extent of the slow down was quickly confirmed. GDP grew by 0.7% in the third quarter of 2014, compared to the 0.9% growth in the second quarter of 2014.  That represented an almost 25% reduction in the rate of growth.  Now according to the ONS growth has slowed sharply again, from that 0.7% figure down to just 0.5%, a reduction in the rate of growth of a further 29%.

The figure could be revised down further in coming weeks, but its clear that the prediction made in October is proving correct.  The year or so of faster growth in the UK, after three years of declining or stagnant growth, was not the product of Liberal-Tory austerity, but despite it.  The Liberal-Tories benefited during that year or so period, from the fact that having sunk the economy so low with their austerity measures, it had to have a sort of dead cat bounce at some point.

The growth when it came did not arise from the kind of restructuring and rebalancing of the economy that the Liberal-Tories had promised would be the result of their austerian economic poison, but came from the old sources of debt fuelled consumption, as people were encouraged by Osborne to take on even more mountains of unsustainable debt, as they were bribed with "Help To Buy", to take on mortgages for massively overpriced properties, that are now beginning to tumble in price, even in London, and as the Liberal-Tories got lucky with one off quirks such as around £7 billion of compensation payments for PPI misselling that found its way into consumers pockets.

But, now house prices are tanking, one demographer who has got a number of market predictions right recently told Moneyweek recently that he saw UK house prices falling by 50%, a fall he said had already begun.  I'm seeing the same thing locally, with large numbers of new housing developments where the builders are reducing prices by around 20%.  Whatever the Liberal-Tories say about rising wages, most people do not see it, and the UK like other economies is now going into the three year economic slow down.

The fourth quarter data has come in even lower than the 0.6% quarter on growth that was the consensus of economists predictions, with output actually down by 1.8% in construction and 0.1% in production, the very areas the Liberal-Tories told us would be the engine of growth as the economy was rebalanced.

The trend for growth is now sharply downwards, as predicted.  The annual growth figure still looks reasonable at 2.6%, but the largest part of that growth came in the earlier part of the year.  At 0.5% quarter on quarter growth, with that rate of growth slowing by around 25% per quarter, the annual rate of growth for 2015 looks likely to be substantially less, and beneath 2%, as the three year cycle is likely to see growth continue to slow until at least the final quarter of the year.  In fact, on this trend, 2015 growth could struggle to exceed 1.5%, way below the government's projections.

With the government already failing to meet its targets on the budget deficit by huge margins, and finding itself having to borrow hundreds of billions more than it planned as a result, the UK could face a similar problem to that of Greece, and other countries.  That is that the cost of reducing the deficit, is to crater the economy itself, and thereby to make the proportion of the deficit to GDP, get ever wider, with a subsequent impossibility of even covering the debt interest.

In Greece, for example, a lot is made of the fact that austerity has reduced the budget deficit significantly, but the cost of that has been to eviscerate the economy itself, causing the ratio of debt to GDP to rise.  Prior to austerity, Greece's debt to GDP ratio was around 110%, now having decimate the economy in order to reduce the deficit, the debt to GDP ratio has risen to around 180%!

The austerian economic experiment, which is really a repetition of failed economic policies and ideological dogma from the 1930's, has once again been a disaster, let alone a failure.  The sooner we follow the example of Syriza, and ditch that policy, in favour of developing a co-ordinated, European wide programme for economic growth and investment the better.

Capital II, Chapter 20 - Part 47

The argument that Marx sets out here is basically the phenomenon that orthodox economics refers to as the Accelerator Effect . It goes like this. Suppose each year, firms replace 10% of their machines. If say there are 100 machines, that means orders for machine makers each year for 10 machines. Suppose then that trade improves by 10%, causing firms to need 10% more machines. That means in this year they demand 20 machines rather than 10. But that represents not a 10% rise in orders to machine makers, but a 100% increase!

It means they will have to double their own purchases of materials, labour-power etc. This argument is usually coupled with the multiplier effect to indicate the extent to which this increase in demand for fixed capital will have a disproportionate effect on the level of aggregate demand.

However, the contrary, also applies. If there is a slow down in trade, firms may postpone their usual replacement of equipment. In that case, machine makers suffer not a 10% reduction, but a 100% reduction in orders, with a consequent effect on aggregate demand. In short, the crisis of overproduction, Marx described.

The problem is made worse, as I suggested earlier, because of the synchronisation of equipment replacement cycles. That means large amounts of equipment may become in need of replacement one year, with very little for the next few years. The basis of Marx's assumption, that replacement was evenly spread, was that different firms begin trading at different times, they expand at different rates, and so on. Equipment is bought at varying times and thereby becomes due for replacement at a range of times.

But, Marx was aware that, in practice, this assumption does not hold. The processes of concentration and centralisation of capital mean that the spread of industrial firms is continually reduced; large firms may make existing equipment last, and replace it top to bottom, with the latest equipment, once it has been proved by other, often newer, smaller firms; moral depreciation, in the form of qualitatively newer, more efficient equipment, forces firms to abandon their existing equipment, whether it is worn out or not, and buy the new equipment.

The consequence is that an increasing proportion of equipment is bought at the same time, and subsequently wears out at the same time. Even where it is not physically worn out, it is replaced with the next generation of equipment, as part of a regular upgrade cycle.

This has been particularly marked in relation to new technology. Computer chips essentially double in power every eighteen months. Software developers base their own development cycle on this increase in speed and power, to determine the kinds of products, or development of existing products they can offer. Buyers of computers, then, have tended to gear their own upgrade cycle to when new versions of operating systems etc. are released, buying replacement machines and software together.

Given the increasing role of services within the economy, and given the centrality of personal computers and software, to much service provision, this is one reason that a discernible three year economic cycle has developed over the last 20-30 years. But, microchip technology has become ubiquitous, whether it is in a mobile phone, a car, a washing machine, or the latest jet liner. Consequently, the upgrade cycle for microchips has a far more regularising and synchronising effect on a range of equipment and commodities than simply that on the PC.

Back To Part 46

Forward To Part 48

Midnight Is The Time - Demis Roussos

In memory of Demis Roussos who died today.

Syriza's Lesson For Labour – To Win, Turn Left

Syriza has gone from a fringe protest party a couple of years ago, to winning yesterday's elections with a large enough vote, even in a sort of proportional representation system, to almost form a majority government. It is just two seats short, and even in the last week has gone from a 2% lead over the right-wing New Democracy party, to an 8% lead in the election itself. It goes alongside a similar rise in popularity from nowhere, of Podemos in Spain, and on a much scale, part of the appeal of the Greens in Britain, and the SNP in Scotland, is their left populist message. In a sense, it is only a mirror image of the right populism of UKIP, the FN, and other such parties across Europe.

The danger for Labour, most clear in Scotland, is that this left populism could cost it votes, and thereby seats required to form a majority government. Those tempted by such left populism, particularly in the shape of the Greens, should remember Cleggmania. Many petit-bourgeois elements were fooled ahead of the 2010 election to believe the fake left rhetoric that the Liberals spouted, simply to garner votes, only to then form a coalition with the Tories, on the most conservative agenda seen in decades. The experience of the Greens where they have run Councils, such as in Brighton, should give workers no more reason to believe their radical rhetoric either.

But, Labour has a simple solution to deal with this danger – turn Left. In the years, both before and after the 2008 financial crisis, the Tories in Britain, said nothing about the need to restrain spending. On the contrary, the new compassionate conservatism that Cameron was supposed to represent, insisted that whatever spending plans Labour had, the Tories would at least match them in government. When the 2008 financial crisis broke out in September of that year, not just the Tories in Britain, said nothing about constraining spending, especially in relation to bailing-out the banks, whose reckless lending policies had been first encouraged by Thatcher in the 1980's. The same keenness to introduce stimulative spending measures was seen in the US, from George Bush. A spate of increased government spending was introduced across the globe, which acted to stem a slide into recession. The arch-Thatcherite Samuel Brittain, wrote in the FT, “We are all Keynesians now.”

It was only in 2009, after the spectacle of very rich bankers, who were seen to have caused the crisis, getting huge multi-million dollar bonuses, and severance packages, not to mention knighthoods, that a reaction set in. On the one hand, there was the reaction of the Occupy Movement, that had a rather amorphous response to the Socialism For The Rich, that was represented by the bank bail-outs. On the other, there was an almost mirror image, libertarian response from the Tea Party. Both attracted significant support in a very short time. The Tea Party was able to have a disproportional effect, because it was able to leverage additional power from within the Republican Party.

That success in 2009, in particular, sent a message to the Tories, to change tack. The message of austerity was not a popular one, whatever the media and conservative ideologists might now claim. It did not, for example, give Cameron enough support to win the election outright. In fact, one reason for the change of tack by the Tories was not to win the election, but merely to consolidate the Tories core vote, for whom reducing the size of the state is a central issue. Similarly, whatever the Liberals may say now, even as they went into the coalition negotiations, they were arguing that austerity was the wrong medicine, until such time as the recovery had been secured.

What we are being told now, is that the reason Labour does not have a clear lead is because it is not trusted on the economy. In turn that is interpreted as meaning that Labour is not trusted to impose austerity. But, there is another interpretation, and one that I think is more valid. It is that Labour's economic message is confused and unclear. On the one hand, they say the Liberal-Tory austerity measures are damaging the economy – a truth that everyone can see in their daily lives, and has been able to see for the last four years. On the other hand, Labour says, but we will basically continue those austerity measures if you elect us! With such a confused and confusing message, no wonder people when asked say they do not trust Labour on the economy. If I was asked that question, I would, if answering honestly also have to say, “No.” My answer would be completely different, if Labour simply said, as Syriza have done, austerity is killing the economy, it is counter-productive, we will end it, and introduce measures to promote economic growth.

As it is, Labour is left in a position, where instead of being able to tell a compelling story, they are left explaining technicalities of why there cuts are better cuts than those of the Liberal-Tories, and when you get into that level of explaining technicalities, the voters stop listening. The lesson of Syriza, of the supposed “Green surge”, and of the support for the SNP, is that people are fed up with austerity. It is a failed policy, based upon conservative ideology, not even upon sensible capitalist economic policy, and social democracy should grow some balls, and say so. Across, Europe, the old social democratic parties, after thirty years of the dominance of that conservative ideology, have become afraid of their own shadow. They are fighting yesterday's wars, in trying to secure their economic credibility, based upon a failed economic policy, whose relevance had limited scope even thirty years ago, but which today has none.

The lesson Syriza's victory, is that if Labour comes out loudly against a continuation of the Liberal-Tory policy of austerity, it can not only sweep aside the left populism of the SNP and Greens, but it can secure a clear majority in May. A further central part of that programme should be to open talks with Syriza, with Podemos in Spain, along with the other European social-democratic parties, first to organise support for and defence of the Syriza government, against the inevitable opposition it will face from conservative forces, and from the interests of money-lending capital. It should form that basis of a rejuvenation of the Second International, as an organising centre for the labour movement, at least across Europe.

Pressure should be put on the German SPD as coalition partner to Merkel to demand the write off of Greek debts, and the convening of a European convention of workers organisations to draw up a programme for an end to austerity, and for growth, based upon a plan for investment across the continent, especially in those peripheral economies that most need capital, in order to provide decent employment, and ensure the development of globally competitive industries.

Cameron and the Tories, switched their message from matching labour's spending commitments to austerity only months before the 2010 election, and despite the unpopularity of that message, it was at least clear compared to the confused message that Alistair Darling was conveying. There is still time for Labour to perform a similar switch of policy away from its current confused message, to one of clear opposition to austerity, and for a clear policy of growth on a planned basis across Europe. They should do so, before its too late. 

Greek Elections Syriza Should Govern Alone

It looks as though Syriza will be two votes short of having an outright majority to form a Government.  The right-wing nationalist Independent Greeks, have said they would support Syriza's opposition to a continuation of austerity.  Syriza could, therefore, form a minority government and push through the main element of its programme without forming a coalition.  It should do so, and challenge the other parties to bring it down and force new elections.  Having come so close to having an outright majority, Greek workers would not understand, if it refused to form a Government.  They will understand if Syriza refuses to form a coalition that would inevitably involve it having to compromise on its core programme commitment.

Given that the Independent Greeks have signalled that they would support Syriza's anti-austerity agenda, they have no bargaining chips to demand a coalition, and Syriza should not give them any concessions.  In a way, the Independent Greeks and other minor parties in Greece are in a similar position to that the SNP would be in, if Labour formed a minority government.  They have no bargaining chips.  If they bring down the government, they will be punished in the subsequent election, for having done so.

Syriza, should form a minority government, in a similar manner to the way Harold Wilson did in 1974, making it clear that they will govern on a provisional basis, ahead of calling new elections to obtain the majority they require to govern without being beholden to other parties.  If Syriza cannot obtain such a majority, then as argued previously they should refuse to take office, and adopt a position of extreme opposition.

An interesting development last night in one of the TV interviews was the comments from the Chairman of the Athens Chambers of Commerce that Europe needed to develop a strategy for growth as an alternative to the failed policies of austerity.  Syriza's victory opens up the potential for social democracy to put forward such an alternative across Europe.  The german SPD has a pivotal role to play in that, because its coalition with Merkel gives them a bargaining position, demanding that such a growth strategy be developed across Europe, starting with a cancellation of Greek debt, as a condition for their continued support for her government.

Fictitious Capital - Part 7

The basis of fictitious capital is the fact that capital itself becomes a commodity in the form of loanable money-capital (though as Marx points out this includes the loan of other forms of capital; it is the money equivalent of that capital value, that is the basis, however, of the calculation of interest). This loanable money-capital thereby gives rise to a claim on future income, in the form of interest. But, interest is a deduction from surplus value created by real capital. Interest is not a self-expansion of value, although the fact that loanable money-capital is only loaned if it produces interest, gives that impression. This claim to a share of future income takes the shape of various forms of legal document – loan certificates, bonds, shares, etc. These certificates then appear as though they are capital, but they are only fictitious capital.

These certificates themselves can be traded, and their market price moves up and down in accordance with supply and demand from speculators. Because each of these forms of certificate provide for a given amount of interest, which may be fixed or variable, movements of the price of the certificates affects the yield obtained by the owner. For example, a £1,000 bond that pays a £50 p.a. coupon, has a yield of 5%, if the bond is traded at its face value. If demand for these bonds rises, pushing their price up to £2,000, it still only pays a £50 p.a. coupon, which means that the yield, the relation between the amount of interest and the price of the bond, falls to 2.5%.

Shares pay a variable amount of interest in the form of dividends, which is dependent upon the profits made by the company, and the decisions of the company management, of what portion of those profits to pay out to shareholders, rather than to retain for investment etc. However, the same principle applies. For any given amount of profits, set aside for dividends, the yield on each share will fall, as the price of the shares rise, and vice versa.

As described earlier, a whole range of derivative products can then be created and traded, based upon the buying and selling of these certificates. In turn these derivative products, can then be traded as commodities, and their price can move up or down, with similar effect. In addition, each of these different kinds of fictitious capital can be used as though they represented real wealth, and can thereby be used as collateral for the purpose of borrowing, or in the case of banks that hold this fictitious capital, can be used as bank capital as a basis for additional lending, which in turn creates further fictitious capital.

Because all of these different forms of fictitious capital can be traded in this way, their price can move up or down completely separated from any changes in the accumulation of real capital, or in the mass and rate of profit. In fact, stock markets frequently rise more during periods of long wave economic downturn than they do during periods of long wave boom. That is because, during the former periods, the rate of profit rises, whilst accumulation of productive-capital, and the issuing of additional bonds and shares to finance it proceeds only slowly.

More precisely, during the Winter phase of the long wave, or the period that Marx describes as the period of stagnation, the rate of profit rises, as wages are pushed down, causing the rate of surplus value and so profit to rise.  The value of constant capital, and the price of raw materials falls during this period, thereby also causing the organic composition of capital to fall, and the rate of profit to rise.  This was seen in the period from around 1987-1999, for example, and forms part of the basis for the new expansion of capital.

In the Spring phase of the cycle, the rate of profit continues to rise, and is accompanied by a strong rise in the mass of profit, as economic activity expands more quickly. Reserves of labour-power are employed, and new reserves are created, by expansion into new geographic areas, along with the continued creation of a relative reserve, as the benefits of the previous innovation cycle, cause productivity to rise.  This is the situation seen from around 1999 to 2012.

In the Summer phase of the cycle, growth continues to be strong, but existing supplies of labour-power begin to be used up, and the advantages of rising productivity to create an additional relative reserve begin to falter, as well as having a reduced effect on reducing unit production costs, to counter rising material prices.  Wages are then pushed up, reducing the rate of surplus value, and squeezing profit margins and the rate of profit.  Any sharp rise in material prices, can no longer be so easily absorbed, squeezing profits further.  It has the effect also of requiring that a greater proportion of profits are devoted to capital accumulation and less is available as loanable money-capital pushing interest rates higher.  It is the situation Marx describes in Chapter 6 and 15 of Capital III.  This situation could be seen, for example, in the Summer phase of the post war long wave cycle, from around 1961-74, and is also described by Glyn and Sutcliffe in "Workers and the Profits Squeeze".

In the Autumn phase, or crisis phase as Marx describes it, these conditions of rising wages, as the supply of labour-power begins to run out, reaches a peak.  Profits are squeezed by a combination of rising wages, stagnant  productivity and an inability to pass on rising costs, as higher levels of consumption lead to higher levels of price elasticity of demand.  Tight profit margins mean that any shock more easily leads to market prices falling below costs of production.  It causes capital to seek a solution to these crises of overproduction by, as Marx puts it, a resort to the Law of The Tendency For the Rate of Profit to Fall. 

“The methods by which it accomplishes this include the fall of the rate of profit, depreciation of existing capital, and development of the productive forces of labour at the expense of already created productive forces.”

(Capital III, Chapter 15)

That is, in order to overcome the constraint on accumulation imposed by higher wages, caused by a shortage of exploitable labour-power, it is incentivised to innovate and to introduce labour-saving technology, which raises the organic composition of capital, and thereby lowers the rate of profit.  It introduces other technologies that cheapen both fixed and circulating constant capital.  These measures weaken the position of labour.  It could be seen in the latter part of the period between 1974-87, and which resulted in the defeat of the miners in Britain, the introduction of new print technology, which undermined the print unions and so on.

This creates the conditions for the rate of surplus value and rate of profit to rise in the Winter phase of the cycle, as set out above, which in turn creates the basis for the new boom.

Speculators are concerned with the total return on the loanable money-capital they advance. A low yield may, therefore, be no discouragement, if the potential exists to make large, quick capital gains. Loanable money-capital may, therefore, be advanced for such speculation rather than to finance the accumulation of real productive-capital. Moreover, this may be the case even where the profits to be made from productive investment itself is high and rising. As Marx and Engels describe, in Capital III, after 1843, a powerful economic boom commenced, which saw large profits being made. The profits financed large scale investment in productive-capital, the opening of new factories, purchase of new machines and so on. Yet, at the same time, the stock market craze of the time, The Railway Mania, saw large scale speculation in railways shares, whose prices rose sharply. This led many businesses then to bleed their working-capital, and to use available money-capital from the large profits, to speculate in railway shares.

This speculation in fictitious capital does nothing to facilitate the accumulation of real productive-capital. On the contrary, for the reason presented above, it can act to limit such accumulation. If there are 1 million shares in issue on a stock market, with an average price of £1, and the total amount of profits available for distribution as dividends is £100,000, the average dividend yield will be 10%. If, additional loanable money-capital enters the market, so that the demand for these 1 million shares rises, the average price per share may rise to £2. But, the additional loanable capital that has entered the market, has not, thereby bought one additional machine or other piece of productive-capital. It has created no accumulation of real capital, and thereby no potential for additional profit.

We now have a situation where the amount of profits available for distribution as dividends is still £100,000, but the price of shares is now on average £2, so the average yield falls to 5%. The speculators will be undeterred that they have seen the yield halve, because the actual amount paid to them as dividends remains the same, £100,000, whilst they have made a capital gain of £1 million due to the rise in the share price! This same principle applies to bonds, and other forms of fictitious capital. It is why, as stock, bond and property markets were massively inflated from the late 1980's onwards, despite rising masses and rates of profit, yields continually declined as the prices rose faster than the mass of profit. It is one factor that made it impossible to finance pension schemes, and why annuity rates collapsed.

Yet, for the speculator, the fall in yield is not significant compared with the potential for quick capital gains. Even an historically high yield of 10%, is nothing compared to the kinds of gains of 20, 30 and even 70% in capital gains that have frequently been made in the period after the late 1980's. In the last three years, for example, the S&P 500 has trebled!  Between 1980 and 2000, the Dow Jones 30 Index rose by 1300%! For the professional managers who run companies, this is also true. It becomes rational to use available profits not to invest in the business, in real productive-capital, that might return 20-30% p.a. in profits, but has to be invested on a ten year time horizon, with all the risks entailed with that, but to invest in the shares of some other company, which might rise by 30% or more in the year, or indeed, to simply use the profits to buy back the companies own shares, which thereby causes their price to rise – as the supply is reduced – and ensures that future years' profits appear as a higher earnings per share. Indeed, with low interest rates, it becomes rational to borrow money not for the purpose of productive investment, but solely for the purpose of buying back stock. 

The inflation of this fictitious capital then can occur completely removed from the accumulation of real productive-capital and profits, and indeed can be a limitation upon it, because productive investment can be crowded out by speculation. But, for that reason, collapses in these financial markets, in the prices of this fictitious capital, should not be confused with economic crises, although the former can lead to the latter.

“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.” 

(Capital I, Chapter 3, note 1 p 137)

But, for the same reason, a collapse of this fictitious capital can be cathartic for real productive-capital, and facilitate its accumulation.

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”

(Theories Of Surplus Value, Part 2, p 496)

Back To Part 6

Syriza and The Banks

Ahead of today's elections in Greece, around €3 billion has been removed from deposits in Greek banks.  Yet that is quite small beer compared with the withdrawal of around €70 billion that happened between 2010 and 2012.  It has still been enough to require the Greek banks to request emergency assistance from the Greek central bank, which ultimately has to obtain the funds from the ECB.  It raises the question, of what a Syriza government should do if it faces a run on the banks, similar to that which happened with Northern Rock in 2007, and happened with a series of other banks in September 2008, and happened again in 2010, as the Eurozone Debt Crisis erupted, as well as more recently happened with the banks in Cyprus.

The answer is that a Syriza government should allow those banks to go bust.  The worst thing it could do would be to step in and nationalise those banks, as no doubt some sections of the reformist Left will propose.  In 2007, when Northern Rock went bust, the British Government stepped in to nationalise it.  In effect what they did was to protect at least part of the investment of shareholders in the bank, and a much larger proportion of the investment of bond holders, and other money-lending capitalists, including those other banks and financial institutions that had recklessly lent to Northern Rock in the money markets, just as Northern Rock had recklessly lent to people buying property, at massively inflated prices, that they could not afford.

Moreover, after Labour rescued those investors, by nationalising Northern Rock, it then faced prolonged criticism and challenges in the courts, from shareholders, who claimed that they had not been compensated enough for the totally worthless shares they had held!  Allowing the banks to actually go bust avoids that problem.  It is then a fact that the shares and bonds have become worthless, and that the creditors of the bank, they be other European banks, the ECB or whoever, are not going to get their money back either.

But, as I argued some years ago, in relation to the Irish banks going bust, in the process, the workers in those banks, should occupy them, and begin to run them under workers control.  That means ensuring that ordinary workers, with deposits at the bank, can continue to have access to those deposits, and continue to meet their payments etc.  The bank going bust does not have to mean that there is a credit crunch caused by an absence of liquidity, it simply means that the fictitious capital owned by money-lending capitalists evaporates.  One thing that Syriza could do, would be to insist that the European Deposit Guarantee Scheme, which protects up to €100,000 for any individual, in a bank deposit, continues to apply, so that the savings of workers are protected.

Another thing that a Syriza government could do would be to ensure that any bank workers taking over such a bank that has become bust, would have the support of the government in converting it into a workers' co-operative, with all of the assets of the bank transferred to it.  Past experience shows why such an approach is preferable to the left reformist demand for nationalisation.  It means that the property is placed directly into the hands of the workers, rather than their enemies in the capitalist state.  Unlike nationalisation, which by definition is a purely nationalistic, reformist solution, establishing worker owned co-operative banks in Greece, enables them to join together with other worker owned co-operatives across Europe, and thereby to directly build a European wide, workers solution in opposition to those of capital.

As Kautsky said in the Erfurt Programme, the capitalist state never nationalises property in the interests of workers.  We should rather place faith only in our own direction actions.  Whatever concessions the capitalist state might appear to make, it will as the owner of such property always revoke them whenever it is advantageous to do so.  That can only happen when the property is in the hands of the workers themselves.  The experience of UCS shows what happens when workers having seized ownership of the means of production for themselves, are persuaded by left reformists to surrender it to the tender mercies of the capitalist state.

There is also a tactical/propaganda reason for a Syriza not to nationalise banks that have gone bust.  Already, the ideologists of conservatism are trying to muddy the waters by characterising Syriza in similar terms to old style, nationalistic, statist reformism.  On today's Murnaghan programme, the Deputy Editor of the Economist, for example, talked about Syriza pulling back from its original position of withdrawing from the EU.  But, of course, Syriza has never had such a position.  A large part of its strength is that it is forcing the issue of opposition to austerity on to the agenda within the context of a united struggle WITHIN the EU, against those conservative positions.

But, a reformist statist policy of nationalisation would facilitate such propaganda from conservatives. It would be portrayed as simply a repetition of the old Stalinist/Fabian policy of bureaucratic control from the top, and the truth is that any such policy will always tend to fall into that category.  By handing over the banks to the workers themselves, it undercuts the potential for such conservative opposition.  In the same way that had Labour Councils handed over their entire housing stock to organised tenants co-operatives, it would have made it impossible for Thatcher to have introduced the "Right to Buy" scheme, and would have made subsequent privatisations impossible, so rubber stamping an effective workers takeover of the banks and their conversion into co-operatives, would make it impossible for them to be handed back to private capitalists some time later, after they have been rescued by the capitalist state, as for example has happened with Northern Rock itself.

If those banks were incorporated into a European wide worker owned, co-operative federation, it would become virtually impossible without something close to a European wide conservative political counter-revolution taking place, for them to be forcibly taken out of the hands of the workers.  One of the most important roles that Syriza can play in relation to the banks is to encourage Greek workers to take their future into their own hands, and not to rely on that future being provided to them by the Greek capitalist state.  In so doing, it creates the conditions for those workers to build their own alternative community organisations as alternatives to those of that capitalist state, and it creates the basis of providing solutions that are centred around the division between worker owned property and capitalist property, as opposed to nationalised Greek capitalist property, versus European capitalist property.  It creates the conditions for a truly internationalist, workers' solution.

Ils Sont Tout Saud

Only a week or so ago they proclaimed - "Je Suis Charlie" - in a faked photo opportunity in Paris, to have us all believe that, despite all of the actions in their own states to limit liberty, they stood shoulder to shoulder to defend bourgeois freedoms with those who had actually given their lives in that endeavour.  Today, those same world leaders, have shown their true nature.  In reality, ils sont tout Saud - they are all the House of Saud, the funeral for whose Godfather they were happy to attend, and of whom they were prepared to lavish all kinds of obsequious praise.

This is a feudal regime, like the others in the Gulf, whose very existence should be anathema to those principles of "Liberte, Egalite, Fraternite", which the bourgeois revolution was fought under.  It was against such feudal regimes that those principles were formulated as their war cry by the revolutionary bourgeoisie.  But, as I set out recently, not only does the liberal bourgeoisie fail to argue for progress under the flag of those principles, but it is not prepared even to consistently defend those principles against reactionary opponents.

Oil Prices. Good For The Economy, Terrible For Financial Markets - Part 7

So far, I have explained why the fall in oil prices is terrible for financial markets, because firstly it exposes considerable amounts of energy debt, in the junk bond market, to the possibility of default that may spread into the wider credit markets, and secondly, it means that large amounts of rent previously accrued from surplus profits, made from primary production, disappear, whilst the same factors cause states to have to go into the money markets as borrowers, which previously were lenders, and which thereby causes global interest rates to rise, at a time when those rates are rising anyway, and when there is considerable volatility in currency and credit markets. I have also given a brief outline of the way the fall in oil prices may be beneficial to the economies of those states that are dependent on oil consumption, and detrimental to those that have been dependent upon oil production. I now turn to a more detailed examination of why lower oil and other primary product prices is beneficial to capital in general.

In Capital III, Chapter 47, Marx writes,

“The physiocrats, furthermore, are correct in stating that in fact all production of surplus-value, and thus all development of capital, has for its natural basis the productiveness of agricultural labour. If man were not capable of producing in one working-day more means of subsistence, which signifies in the strictest sense more agricultural products than every labourer needs for his own reproduction, if the daily expenditure of his entire labour power sufficed merely to produce the means of subsistence indispensable for his own individual requirements, then one could not speak at all either of surplus-product or surplus-value. An agricultural labour productivity exceeding the individual requirements of the labourer is the basis of all societies, and is above all the basis of capitalist production, which disengages a constantly increasing portion of society from the production of basic foodstuffs and transforms them into "free heads," as Steuart [Steuart, An Inquiry Into the Principles of Political Economy, Vol. I, Dublin, 1770, p. 396. — Ed.] has it, making them available for exploitation in other spheres.”

In other words, the point that Marx is making here is that in every society, whatever the mode of production, the Law of Value dictates that in order for available social labour-time to be devoted to the production of additional types of use value, the labour-time required to produce the existing use values, required for the consumption of the producers, must fall. The mistake the Physiocrats made, as Marx details later, is that they failed to take into account, given the time they were writing, that not all of these use values required for consumption by the producers, are agricultural products, or other products extracted from the ground. 

“In natural economy proper, when no part of the agricultural product, or but a very insignificant portion, enters into the process of circulation, and then only a relatively small portion of that part of the product which represents the landlord’s revenue, as, e.g., in many Roman latifundia, or upon the villas of Charlemagne, or more or less during the entire Middle Ages (see Vinçard, Histoire du travail), the product and surplus-product of the large estates consists by no means purely of products of agricultural labour. It encompasses equally well the products of industrial labour. Domestic handicrafts and manufacturing labour as secondary occupations of agriculture, which forms the basis, are the prerequisite of that mode of production upon which natural economy rests — in European antiquity and the Middle Ages as well as in the present-day Indian community, in which the traditional organisation has not yet been destroyed. The capitalist mode of production completely abolishes this relationship; a process which may be studied on a large scale particularly in England during the last third of the 18th century.”

(ibid)

On this basis, it can be seen why a fall in the price of any primary product, such as oil, which is ultimately a reflection of precisely this fact, that productivity has risen, the amount of social labour-time required for production has fallen, forms the basis both for the production of additional ranges of use values, and for a fundamental rise in real wages, which is the other side of this increase in physical production. The reduction in the social labour-time required to produce the society's consumption fund, the physical products required by the producers for their reproduction, releases social labour-time – it thereby creates additional surplus labour-time. As Marx sets out,

“The specific economic form, in which unpaid surplus-labour is pumped out of direct producers, determines the relationship of rulers and ruled, as it grows directly out of production itself and, in turn, reacts upon it as a determining element. Upon this, however, is founded the entire formation of the economic community which grows up out of the production relations themselves, thereby simultaneously its specific political form. It is always the direct relationship of the owners of the conditions of production to the direct producers — a relation always naturally corresponding to a definite stage in the development of the methods of labour and thereby its social productivity — which reveals the innermost secret, the hidden basis of the entire social structure and with it the political form of the relation of sovereignty and dependence, in short, the corresponding specific form of the state.”

(ibid)

Under capitalism, this form is the extraction of surplus value, as the workers produce a greater quantity of new value, than is represented by the value of their own labour-power. In other words, the worker may work for 8 hours per day, and thereby creates 8 hours of new value, as a consequence of their labour, but the value of their labour-power, the commodity they sell to capital, may only be 4 hours. That is it requires only 4 hours of labour to produce the commodities required for its own reproduction. Of the 8 hours of new value the worker produces, only 4 is required to reproduce their labour-power, and flows back to them in the form of wage goods, which they buy with the wages paid to them. That leaves, commodities with a value of 4 hours in the hands of capital, for which it has paid nothing – a surplus value.

But, its clear that this surplus value can rise by two different means. Firstly, the working-day might be lengthened, and so the portion of absolute surplus value is increased. Secondly, the working-day may remain of the same length, but the portion of it required to produce the commodities required for the reproduction of labour-power may fall, as in the examples above. A fall in the price of oil, or other primary products, thereby reduces the value of labour-power, and increases the proportion of surplus value. It raises the rate of surplus value. This increase in the rate of surplus value, acts to increase the rate of profit, which induces additional investment. But, it also increases the mass of surplus value, thereby raising the potential for additional investment, either in existing products, or in an expansion of capital into the development of new industries.

This is the first means by which a fall in oil prices acts to stimulate economies. In Part 8, I will examine, other means by which the fall in the price of oil acts to raise the rate and mass of profit, and to stimulate economic activity.

Back To Part 6

Forward To Part 8

Labour's Immigration Policy Is A Mess - Part 5

The attitude of Blair's government between 1997 and 2010 is symptomatic of this bureaucratic, statist approach of social democracy, described in Part 4. Blair's government faced a similar problem, after 1999 in particular, as Tory Governments had faced in the 1950's.

Just as a new long wave boom began after 1949, so a new boom began after 1999. After 1949, that boom in Britain, particularly after large numbers of working age men had died during the War, faced labour-power shortages that were met in a number of ways. Married women were encouraged into the workforce. The newly created Welfare State, began to provide nurseries and childcare, so that a new generation of workers could be born, whilst their mothers were relieved of some of the requirements of child rearing, that would have prevented them selling their labour-power to capital. The Welfare State, also provided healthcare on a mass produced, Fordist basis, which ensured more workers lived longer, and were patched up so as to be able to keep supplying their labour-power to capital on a more sustainable basis. It also provided education and training to workers, so as to ensure that capital had a supply of the kinds of labour-power it required in a changed, more technological society. By increasing the proportion of complex labour to simple labour, that meant that a given number of workers, thereby provided a greater quantity of abstract labour.

But, even all this, and the further releasing of reserves of domestic labour, by the introduction of a range of labour-saving domestic appliances, was not enough. As workers found themselves in a better bargaining position so as to demand higher wages, and to reject the lower status jobs, especially as better education meant they were now able to apply for the expanding range of higher value, white collar, administrative, technical and managerial jobs, so capital was led to look to fill the large numbers of unskilled jobs, by encouraging immigration.  

A frequent refrain from those who want to claim that their opposition to immigration is not racist, is that “its not about the numbers” coming in, but only about any policy being one that ensures controlled borders. In other words, they are claiming that there is no particular limit, in their mind, of how many workers should be allowed to migrate into the country, other than, whatever the number, it should be based primarily on the interests of British capital, its requirement for particular types of labour, in particular quantities. Its on this basis that Labour, for example, attacks the caps on immigration, proposed by the Tories.

But, in the 1950's, the numbers coming in were geared to this end, and the numbers were not that great. Moreover, the other aspect of the “its not about the numbers” excuse didn't apply either. That is that the infrastructure of availability of houses, schools, hospitals etc. should be able to cope with any increase. During this period, all of these things were being provided in increased quantities, and indeed, then as now, many of the immigrants were required to provide them. Yet, just as happened at the start of the century, when the Aliens Bill was introduced, it is clear that the opposition to the immigration was racist, and the argument about numbers was simply a cover. When the level of immigration was still very low, when wages were rising due to a shortage of labour-power, when the post-war boom was creating significant numbers of additional housing, including council housing, and a rapidly expanding welfare state, the signs in rented housing stating “No Blacks, No Irish, No Dogs” were still common.

When we hear today arguments about opposition to immigration not being racist, the same thing applies. Labour has been happy to accept the notion that this is the basis of opposition by many potential voters, because it is easier to do so, and address the conclusion to that, by pandering to it in the form of some form of humane, anti-racist immigration policy, than to deal with the truth.

We are repeatedly told that Britain is an harmonious, tolerant society, where racist and bigoted views are held by only a tiny minority. It is the same kind of liberal cowardice to tackle unpleasant truths that leads to the argument that religion is peaceful and so on, and which, thereby again tries to present religious violence and intolerance as only being the actions of an aberrant minority of extremists. This myth is also perpetuated by many sections of the left too, who mostly being middle class students, or former middle class students now ensconced in middle class jobs, are afraid to allow themselves anything other than a rose tinted view of the real working-class, a view which their separation from that real working-class allows them to continue to hold. It allows them to continue to believe that the only thing holding back socialism, is the continual betrayal and misleadership of those workers by the TU and Labour bureaucrats. 

Yet, anyone who lives in the real world knows this is far from the truth. The unpleasant reality is that apart from specific, usually short-lived periods, the TU and Labour leaders are generally ahead of the mass of workers in terms of their class consciousness. Around 30% of workers hold views that are essentially racist. They are not hardened racists of the type of the BNP, but they are views that are racist in the sense described above, that even were there no problems with jobs, housing and so on, they would still see immigration as a problem. In fact, its often in areas where there is least immigration where opposition is greatest. It is reflected in the fact that so many are prepared to accept as fact, lies that are quite clearly preposterous for anyone with a brain. For example, you do not have to go far, or hear many vox pop interviews, to hear the same “facts” trotted out about immigrants not only being given free luxury houses, but being given free cars, being allowed to drive without passing their test and other such nonsense.

Yet nothing is done to address those ideas, that are also widely disseminated by the gutter press such as the Express and Mail, because to do so, in an adequate manner, would not just mean admitting that these ideas are widely held amongst sections of the working-class, but would, more significantly, involve taking on the power of that section of the press, and the conservative social forces upon which it rests. The reason that Labour's immigration policy is a mess, is the same reason that Social Democracy's position in dealing with all other manifestations of conservatism is a mess, that is its timidity in waging an all out war against the attempts of that conservatism to impede the further development of modern, industrial capitalism, and where possible even to roll that development back. It is seen in the cringing, cowardly position of social-democracy in relation to a defence of basic bourgeois freedoms such as the right to free speech, when under attack by religious zealots.

Back To Part 4