The fall in the profits of oil companies, and other companies involved in the production of primary products, is, of course, a reason for the shares of those companies to drop. However, the fall in those prices, means that the value of constant capital for nearly all other capital, means that capital is released, which can be used for increased accumulation. It also means that, because these other capitals have to advance less capital, the rate of profit for these other capitals rises. Finally, this fall in values means that wage goods, become cheaper, so the value of labour-power falls, which means the rate of surplus value rises, not only increasing the mass of surplus value produced, but also directly raising the rate of profit. All of these factors mean that for this much greater mass of capitals, there is every reason for share prices to rise.
The reason the sharp drop in the price of oil, and other primary products causes a sharp fall in financial markets, is rather because it means that the vast surplus profits that previously went into speculation in global bonds, shares, and property, suddenly disappears. That means the global surplus of loanable money-capital, which for decades had caused interest rates to fall, also goes into reverse. Countries like Saudi Arabia, Norway, Russia and so on, which previously amassed huge pools of loanable money-capital, which financed budget surpluses, and the creation of sovereign wealth funds, instead find that they have budget deficits, so that they must draw down from thes reserve funds, and even begin to borrow themselves on capital markets.
Just as, the Swiss National Bank found that it could not perform the role of King Canute, and had to concede to the power of the market, which instantaneously caused the value of the Dollar and Euro, and other currencies to drop by 25%, so similar huge and unforeseen events are inevitable as a consequence of these large drops in primary product prices. Russia has seen its interest rates rise to 17.5%, large rises have occurred in South Africa, Turkey, and other large emerging economies. Several foreign exchange firms have gone bust, as a result of the decision of the SNB, and the two main Greek banks have called on the ECB to provide them with emergency liquidity injections. That is before the ECB itself adds to the volatility by introducing some form of QE.
All of these are indications of an inevitable financial crisis that must break out in the not too distant future, as I have set out in my book. But, this is a financial crisis, not an economic crisis, although, as Marx points out, such severe financial crises can themselves roll over into the economic sphere.
“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.”
(Capital I, Chapter 3, note 1 p 137)
But, as stated above, the overall effect of the drop in the prices of these primary products on economies is extremely positive. Marx notes,
“The raw materials here include auxiliary materials as well, such as indigo, coal, gas, etc. Furthermore, so far as machinery is concerned under this head, its own raw material consists of iron, wood, leather, etc. Its own price is therefore affected by fluctuations in the price of raw materials used in its construction. To the extent that its price is raised through fluctuations, either in the price of the raw materials of which it consists, or of the auxiliary materials consumed in its operation, the rate of profit falls pro tanto. And vice versa...
Since the rate of profit is s/C, or s/(c + v), it is evident that every thing causing a variation in the magnitude of c, and thereby of C, must also bring about a variation in the rate of profit, even if s and v, and their mutual relation, remain unaltered. Now, raw materials are one of the principal components of constant capital. Even in industries which consume no actual raw materials, these enter the picture as auxiliary materials or components of machinery, etc., and their price fluctuations thus accordingly influence the rate of profit. Should the price of raw material fall by an amount = d, then s/C, or s/(c + v) becomes s/(C - d), or s/((c - d) + v). Thus, the rate of profit rises. Conversely, if the price of raw material rises, then s/C, or s/(c + v), becomes s/(C + d), or s/((c + d) + v), and the rate of profit falls. Other conditions being equal, the rate of profit, therefore, falls and rises inversely to the price of raw material. This shows, among other things, how important the low price of raw material is for industrial countries, even if fluctuations in the price of raw materials are not accompanied by variations in the sales sphere of the product, and thus quite aside from the relation of demand to supply. ”
(Capital III, Chapter 6)
In Part 8, I will examine, then why despite this, financial capital has seen these falls in prices as indicating a reduction in profits, which then causes a sell of in stock markets.
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