Thursday, 22 January 2015

The Long Wave - Part 9

As set out in Parts 7 and 8, the basic outline of the cycle can be described as follows. The Spring phase of the cycle, is characterised as a period when the annual rate of profit is rising, and when as a consequence of increased economic activity, this causes a sharp rise in the mass of profit created. In discussing the different phases of the business cycle, and the effect on the rate of interest, Marx also outlines the other result of this.

“After the reproduction process has again reached that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended; this forms, indeed, the "sound" basis again for a ready flow of returns and extended production. In this state the rate of interest is still low, although it rises above its minimum. This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. On the other hand, those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers.”

(Capital III, Chapter 30)

In other words, the conditions can be seen here in the Spring phase of the cycle for that over exertion that leads to crises of overproduction. The rising and high annual rate of profit, not only provides the incentive for such accumulation, but it also creates the conditions for low interest rates, which thereby also encourages speculation, and swindling that leads to financial crises, which in turn have an effect on the real economy, such as occurred in 2008, but which Marx and Engels also describe in relation to the financial crisis of 1847. This is the situation that Marx is describing when, near the start of Capital III, Chapter 15, he says,

“It breeds over-production, speculation, crises, and surplus-capital alongside surplus-population.”

Marx describes this situation of a high rate and mass of profit, which leads to a rapid accumulation of capital, whilst simultaneously causing interest rates to be low, which in turn leads to crises of overproduction, and speculation also in Theories of Surplus Value.

“The same phenomenon (and this usually precedes crises) can appear when additional capital is produced at a very rapid rate and its reconversion into productive capital increases the demand for all the elements of the latter to such an extent that actual production cannot keep pace with it; this brings about a rise in the prices of all commodities, which enter into the formation of capital. In this case the rate of interest falls sharply, however much the profit may rise and this fall in the rate of interest then leads to the most risky speculative ventures.” 

(TOSV2 p 495-5)

Engels, made this clear in his description of the 1847 crisis, when he wrote,

“But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire. With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844, stock was fully underwritten, i.e., so far as there was money to cover the initial payments. As for the rest, time would show! But when further payments were due — Question 1059, C. D. 1848/57, indicates that the capital invested in railways in 1846-47 amounted to £75 million — recourse had to be taken to credit, and in most cases the basic enterprises of the firm had also to bleed.”

(Capital III, Chapter 25)

The Spring phase of the cycle is one in which the new base technologies developed in the previous Autumn phase, and which begin to be introduced in the Winter phase, where they also begin to appear as new types of industry, are rolled out more extensively. The rising and high rate of profit they bring with them, creates the conditions for crises of overproduction, as well as financial crises caused by speculation encouraged by low rates of interest, and increased supplies of loanable money-capital. But, it is only in the Summer phase of the cycle that this begins to have a demonstrable effect on the rate of surplus value, as labour supplies begin to be run down, and wages rise. 

What we have then again, is a situation where the annual rate of profit begins to fall, but not due to the law of falling profits, which requires rising social productivity, but due to the fact that the effect of previous innovations begins to wane, so that the rate of turnover of capital does not rise so quickly, the ability to reduce unit costs through greater efficiency declines, and as wages rise, the rate of surplus value falls. But, it is precisely this situation that Marx describes, in which such a fall in the rate of profit leads not to a fall in investment, but an increase, as each individual capital attempts to retain market share, by investing in additional output, in an attempt to obtain economies of scale, in additional research and development to produce new commodities and so on. This, additional investment of capital, means that the annual rate of profit falls further, but it also means that this additional investment is financed increasingly by drawing on the pool of loanable money-capital. Businesses must raise additional loans, issue additional bonds, or new shares to obtain this money-capital. This is one of the reasons that during such periods, increased economic prosperity runs in the opposite direction to financial markets.

The increased supply of bonds, reduces their prices, causing yields to rise. Rising bond yields, together with an increased issuance of shares, causes share prices to fall, and dividend yields to rise. In general, the increased demand for loanable money-capital, relative to the supply of loanable money-capital, causes interest rates to rise. As Marx puts it,

“To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level.”

(Capital III, Chapter 30)

These are the conditions described above, whereby the accumulation of capital is overwhelmingly extensive rather than intensive. This reaches its height during the Autumn phase.

“It reaches its maximum again as soon as the new crisis sets in. Credit suddenly stops then, payments are suspended, the reproduction process is paralysed, and with the previously mentioned exceptions, a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital.”


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