Wednesday, 11 March 2015

The Long Wave - Part 15

The other consequence of the sharp reversal in raw material prices, discussed in Part 13 and 14, is that it affects the volume of loanable money-capital thrown in to global money markets. This has been discussed elsewhere. The high prices of raw materials, lead to surplus profits, and rents, which are then transformed into loanable money-capital, thrown on to global money markets, which act to reduce global interest rates. By the same token, when those raw material prices drop sharply, those rents are rapidly diminished. Indeed, especially in economies that rely primarily upon revenues from the export of such products, for the financing of the state, this reversal means that rather than building up additional funds to be loaned, the state is forced itself to borrow in global money markets. The consequent reduction in the supply of loanable money-capital, and rise in its demand, causes global interest rates to rise.

This rise in global interest rates occurs, also, because, as set out earlier, as the Summer phase of the cycle proceeds, the rate of profit falls, as a result of rising wages, and slowing productivity growth. This fall in the rate of profit, during this phase of the cycle, leads to higher levels of investment, as individual firms seek to maintain and extend market share, causing a reduced supply of loanable-money capital, and a rising demand for loanable money capital.

The consequent rise in interest rates results in falls in the value of fictitious capital. Stock markets, bond markets, and property markets fall, and experience financial panics. The fall in the prices of this fictitious capital has no effect on the real productive-capital. The fall in a company's shares does not change the ability of the company's machines and other productive-capital to produce commodities, and surplus value. In fact, to the extent that speculation in this fictitious capital crowds out productive-capital for available loanable money-capital, the collapse of such bubbles performs a cathartic effect for capital as a whole.

"... 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)

During the Autumn phase of the cycle, these contradictions assume their most acute form, and break out in distributional struggles. Capitals begin to demand money-capital not to expand, but merely to stay afloat. Interest rates rise to their highest level.

“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.”

(Capital III, Chapter 30)

By the end of the Autumn phase, some businesses have gone bust, the low rate of profit causes a slow down in the formation of new capitals, and expansion of existing capitals. The introduction of new labour-saving technologies, alongside this sluggish growth causes unemployment to rise, which undermines workers' position. Individual capitals stop competing against each other for additional labour supplies, and are more willing to resist wage claims. Wages begin to fall. This was seen, for example in the 1920's, leading to the British General Strike of 1926, and again in the period after 1974, which culminated, in Britain, with the defeat of the Miners in 1985. Accumulation begins to be more intensive than extensive, creating the conditions for the Law of the Tendency for the Rate of Profit to Fall, to operate, seen, for example, in the introduction of new technology in the print industry and elsewhere during this period.

As the organic composition of capital rises, without a widened base for capital accumulation, the annual rate of profit falls, and interest rates peak. By the end of the Autumn phase, unemployment has risen causing wages to fall, and thereby the rate of surplus value to rise. The lower level of economic activity, with still high levels of supply of primary products, causes their prices to fall and stagnate. A look at the price of copper over the cycle demonstrates this point.

As the Winter phase proceeds, the rising rate of surplus value, brought about by rising productivity, consequent upon the shift to intensive accumulation, causes the profit margin to rise. Low prices for the elements of constant capital causes the rate of profit to rise, whilst the low level of accumulation causes the supply of loanable money-capital to exceed the demand, so interest rates fall.

“Not every augmentation of loanable money-capital indicates a real accumulation of capital or expansion of the reproduction process. This becomes most evident in the phase of the industrial cycle immediately following a crisis, when loan capital lies around idle in great quantities. At such times, when the production process is curtailed (production in the English industrial districts was reduced by one-third after the crisis of 1847), when the prices of commodities are at their lowest level, when the spirit of enterprise is paralysed, the rate of interest is low, which in this case indicates nothing more than an increase in loanable capital precisely as a result of contraction and paralysation of industrial capital. It is quite obvious that a smaller quantity of a circulation medium is required when the prices of commodities have fallen, the number of transactions decreased, and the capital laid out for wages reduced; that, on the other hand, no additional money is required to function as world-money after foreign debts have been liquidated either by the export of gold or as a result of bankruptcies; that, finally, the volume of business connected with discounting bills of exchange diminishes in proportion with the reduced number and magnitudes of the bills of exchange themselves. Hence the demand for loanable money-capital, either to act as a medium of circulation or as a means of payment (the investment of new capital is still out of the question), decreases and this capital, therefore, becomes relatively abundant. Under such circumstances, however, the supply of loanable money-capital also increases, as we shall later see.”


The reason “the supply of loanable money-capital also increases” is that during this Winter phase of the cycle, the rate of profit increases, creating a rising mass of realised profits, and loanable money-capital.

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