Wednesday, 25 February 2015

The Long Wave - Part 13

In Part 12, it was indicated how the fall in the rate of profit during the Summer phase, and which intensifies in the Autumn phase, is due to tightening labour markets pushing up wages, alongside increased price elasticity of demand, which make it more difficult to pass on rising production costs, especially as productivity gains, to mitigate rising unit costs, wane. However, two other factors are also at work during this phase.

Firstly, as indicated previously, the sharp rise in demand for primary products, which caused their prices to rise, in the Spring phase, brings forth a sharp increase in investment in this sphere, which takes time before it bears fruit. But, once this investment does begin to cause large increases in primary products to flood into the market, the previous famine turns to feast, and previous high prices turn into rapidly falling prices, for these products, until such time as the excess supply is used up, and the less efficient producers are flushed out. That is being seen currently in relation to oil, copper, milk and other primary products.

“It is, in the nature of things that vegetable and animal substances whose growth and production are subject to certain organic laws and bound up with definite natural time periods, cannot be suddenly augmented in the same degree as, for instance, machines and other fixed capital, or coal, ore, etc., whose reproduction can, provided the natural conditions do not change, be rapidly accomplished in an industrially developed country. It is therefore quite possible, and under a developed system of capitalist production even inevitable, that the production and increase of the portion of constant capital consisting of fixed capital, machinery, etc., should considerably outstrip the portion consisting of organic raw materials, so that demand for the latter grows more rapidly than their supply, causing their price to rise. Rising prices actually cause 1) these raw materials to be shipped from greater distances, since the mounting prices suffice to cover greater freight rates; 2) an increase in their production, which circumstance, however, will probably not, for natural reasons, multiply the quantity of products until the following year; 3) the use of various previously unused substitutes and greater utilisation of waste. When this rise of prices begins to exert a marked influence on production and supply it indicates in most cases that the turning point has been reached at which demand drops on account of the protracted rise in the price of the raw material and of all commodities of which it is an element, causing a reaction in the price of raw material.”

(Capital III, Chapter 6)

In fact, since Marx's time, the scale of production has risen so much that primary products such as oil, copper and other minerals have to be considered in the same way as food production. Production from existing mines and quarries can be increased, but today the expansion of production, during the Spring phase, is so great that the demand can only be met by the opening up of new mines and so on. As described earlier, it takes around 7 years to develop a new copper mine, and several more to bring it to optimal production, so that a period of around 12-13 years, equal to the length of the Spring phase of the cycle is required, before this flood of new supply hits the market. Its on that basis that its now that such gluts of oil, milk and copper etc. are being seen on world markets, not due to falling demand, but due to hugely increased supply.

“The sudden collapse of the price of raw materials checks their reproduction, and the monopoly of the original producing countries, which enjoy the most favourable conditions of production, is thereby restored — possibly with certain limitations, but restored nevertheless. True, due to the impetus it has had, reproduction of raw material proceeds on an extended scale, especially in those countries which more or less possess a monopoly of this production. But the basis on which production carries on after the extension of machinery, etc., and which, after some fluctuations, is to serve as the new normal basis, the new point of departure, is very much extended by the developments in the preceding cycle of turnover.”


That is a good description of the situation we see today with oil and so on. At the point the current overproduction is cleared from the market, and the less efficient producers flushed out, prices will stabilise at a lower level than at their highest point, but higher than the lows required to clear the market. But, these lower prices will go along with an overall higher level of demand and supply of oil in the global market. That applies to all other such primary products.

But, these changes have further consequences, which I will examine in Part 14.

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