Tuesday, 20 January 2015

Why That 1% Figure Is Meaningless and Misleading

The media has been full, over the last few days, of the report from Oxfam, suggesting that the wealthiest 1%, of the world's population, own nearly as much as the other 99%, put together, and soon will own more. According to Newsnight, to be in that top 1%, you need the equivalent of £530,000 of assets, including your house. To put that in context, that would include about a third of people who live in the UK. I doubt the vast majority of those people – about 20 million – would consider themselves anything more than comfortably well off, let alone rich, and certainly not part of the global super rich. In what way is it useful to lump together such large numbers of people, who are simply comfortable, with someone like Warren Buffett, with more than $50 billion of wealth, or any of the other truly super rich, who are able to exercise real control over capital, and political power?

The average house in London currently is priced at £400,000. That leaves just £130,000 to be made up, for someone to fall into this category. Someone, in their late 50's, for example, who bought such an average house, 40 years ago, when it would have cost around £26,000, simply on the basis of being on average earnings, during that period, could easily have made up the other £130,000 from the value of their pension, and just using their annual allowance for tax free TESSA's, PEP's and ISA's. For example, if you had put just £1,000 a year into a PEP, between 1982-87, tracking the DOW Jones, the £5,000 you put in, just during that five year period, would today be worth around £80,000, and a lot more, if it reinvested dividends.

What the figure actually demonstrates, is the huge gap in wealth between rich countries and poor countries, where billions of people continue to live in terrible poverty, even as many of those economies grow rapidly, and increasing numbers of people, in those countries, continue to be lifted out of poverty. Its not surprising that OXFAM focus on such a division, rather than the division between the truly rich and the rest, that exists within each society, rich or poor. In fact, this 1% figure obliterates that more significant distinction, and, in the process, lumps together the interests of workers and capitalists, rich and poor in one country, against the interests of those same groups in some other country.

But, the 1% figure is bogus for another reason. Picketty, in his analysis of wealth, failed to make the distinction between productive wealth and other forms of wealth, such as household wealth. Marx long ago made the point that there is a big distinction between owning a house, which cannot self expand in value, i.e. is not capital, and owning, for example a factory, which is capital, because its sole function for its owner is to produce commodities that can be sold at a profit. In other words, there is a great difference between productive wealth, and non-productive wealth.

Yet, left-wing economists, including some Marxists, have effectively fallen into the same trap when they consider the wealth of the majority of capitalists today. The reality is that wealth of the majority of capitalists, and of today's other super rich (such as landlords in the Gulf etc.), does not exist in the form of ownership of productive-capital. In fact, ownership of productive-capital today, as has been the case for more or less the last 100 years, is the preserve not of the super rich, but of the small capitalists, or alternatively of socialised capital itself. In other words, the productive-capital is owned by the functioning capitalist be that a private capitalist, or the firm itself. A public liability company, can, for example, use its profits, or use other forms of borrowing so as to buy back all of the issued shares, so that it has no shareholders.  It then only has employees, with all of the productive-capital manifestly owned by the firm, as a legal entity, itself.  It is not owned by the shareholders or others who merely lend money to the firm to be used as money-capital, to metamorphose into productive-capital.

The vast majority of the super rich do not own productive-capital, they own shares, bonds, and other forms of fictitious capital. In other words, as Marx put it, in Capital III, they have been turned into money-lending capitalists, coupon clippers, and the money they lend is to the actually functioning productive-capital. When a bank lends money to someone to buy a house, the bank does not own the house, the person who buys the house does. The bank, as Marx and Engels set out, continues to own the money they lend, and on that basis they have a right to its return, plus interest. The bank owns the mortgage not the house.

Similarly, when the bank lends money to a productive-capitalist to buy a machine, the bank owns the money it lends, and is entitled to its return, plus interest, whilst the firm or capitalist that borrows this money, is the owner of the machine, not the bank. Nothing is changed here, if the firm that borrows the money does so by issuing bonds, or issuing shares as the means of borrowing the money it requires. The bond holder or share holder continues to own the money they lend to the company when they initially buy its shares or bonds, whilst it is the firm, not the shareholder or bondholder that owns the productive-capital itself.

The bank that holds a mortgage, or other form of loan certificate, the bondholder, or shareholder are not the owners of productive-capital, but as Marx sets out, the owners of fictitious capital. But, the price of fictitious capital moves up and down on the market, independently of changes in the actual value of productive-capital. It is determined by quite different dynamics that drive demand and supply for bonds, and shares etc. Because none of this fictitious capital has any real value – it is not the product of labour, and its price is determined purely subjectively on the basis of demand and supply – what appears to be a great deal of wealth in the hands of such money-lending capitalists, landowners and so on, today, can have completely evaporated overnight. The people who owned large amounts of this fictitious capital in 1929, soon discovered that reality.  The same was true when house prices collapsed by 60% in various markets in 2008/9.  By contrast, the value of real productive-capital, in the shape of say a machine, continues to be determined objectively by the labour-time required for its production, and that machine, as productive-capital continues to be able to self-expand in value, to produce profits, just as before.

What determines the market price of shares, bonds, and land/property is not the rate of profit, but the rate of interest, and the rate of interest is determined on the basis of a struggle between money-lending capital and productive-capital. As Marx points out, one reason that interest rates tend to be lower in more mature societies, is that former productive-capitalists, having made enough money to live off, retire from their productive activity, and make this money-capital available to others to engage in production. The more mature a society, the more of such people there are, and so the greater mass of potential loanable money-capital, in proportion to the demand for that capital.

This determination of the rate of interest, which thereby determines the yield available on bonds, of dividends on shares etc. is then quite separate from the movement of the value of profits, or the value of productive capital. As Marx puts it,

“On the whole, then, the movement of loan capital, as expressed in the rate of interest, is in the opposite direction to that of industrial capital.”

(Capital III, Chapter 30)

As interest rates rise, because the demand for loanable money-capital rises relative to its supply, so bond, share and property prices fall. But, this fall in the price of fictitious capital, just as previously its rise, has nothing to do with the accumulation of real productive wealth.

"... the reduction of the money equivalents of these securities on the stock exchange list has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners."

(Capital III, Chapter 30)

A share, or bond, or mortgage is no more capital than is a house. It has no potential to self expand in value. It only appears to do so, because it gives the owner an entitlement to interest. But, the payment of interest is only possible, if real productive-capital expands in value, in other words if it creates profits. But, that real productive-capital belongs to the productive-capital that borrowed money capital, in exchange for the issuing of shares, bonds etc., not to the money-lending capitalist that lent the money in exchange for bonds, shares and so on, that merely gives them a claim to interest, to be paid out of those future profits.

Whether the nominal value of bonds, shares, property and so on moves up or down has nothing to do with the creation of additional wealth. Additional wealth (in its capitalistic context) can only be created by productive-capital, via the accumulation of real capital, via the production of surplus value. Not one penny's worth of real wealth is created as a consequence of the price of shares rising by however great an amount. For the same reason, real wealth is not reduced by a penny due to a collapse in those bond, share and property prices. 

“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.”

(TOSV2 p 496) 

A rise in the price of bonds, shares, or property is then not at all the same as a rise in the mass of productive-capital. The former provides no basis for additional income, and so the nominal rise in this wealth is no different to the nominal rise in the price of houses. If house prices rise by 10%, anyone who sells their house for this higher price, equally finds that in buying an equivalent house it costs them 10% more, so that they have, in reality, gained absolutely nothing. Similarly, if the price of shares rises by 10%, if a shareholder sells their shares, in company X, in order to buy shares in company Y, the higher price they get for the shares they sell, is matched by the higher price they have to pay for the shares they buy.

It is a confusion of bourgeois economics, that many on the left seem to have accepted, that a rise in the nominal value of this fictitious capital, brings with it a claim to additional revenue, in the shape of additional dividends, yield etc., but Marx and Engels make clear that no such thing is possible. The maximum amount that can be paid out as interest in whatever form, is determined by the rate of profit, which is a function of the productive-capital, not the fictitious capital. If the amount that can be paid out as dividends, for instance, remains constant, because the rate of profit has remained constant, but share prices rise (which reflects the fact that the supply of loanable money-capital has risen relative to the demand) then dividend yields must fall. In fact, under such conditions a rise in the total stock value, may result in less revenue being distributed as dividends, rather than more.

No comments: