Sunday, 25 January 2015

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.”


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.”


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.

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