Friday, 3 April 2015

The Long Wave - Part 22

In the Summer, and Autumn phase of the cycle, conflict is also enhanced between the money-lending capitalists and landlords on the one side, and industrial capital on the other. The latter get stronger, whilst the former become weaker. As economic activity intensifies, and the demand for loanable-money capital rises, relative to its supply, interest rates rise. This may seem to favour the money-lending capitalists, but, in fact, the rate of interest rises as a consequence of significant reductions in the value of fictitious capital. In other words, there are significant stock market crashes and periods when stock prices slide, or only rise slowly. The same thing applies in the bond market. In the same way, land prices fall sharply. There is a significant shift in wealth away from financial and landed capital towards industrial capital, and labour.

The yield or rate of interest is inversely related to the price of financial assets. As Marx describes, the rate and mass of profit are determined by factors wholly separated from the price of these financial assets. It is, on the contrary, the rate and mass of profit, which both determines the demand for and supply of loanable money-capital, which in turn determines the rate of interest. If the demand for loanable money capital rises, businesses issue additional shares or bonds, so as to raise these funds. The increased supply of these share and bond certificates, thereby causes their market price to fall. By this means, the yield on these shares and bonds (the relation between the amount of dividend or coupon to the price of the share or bond) rises, causing all market interest rates to rise.

But, Marx also demonstrates that the price of land is a function of capitalised rent. So, if the average annual rent on an acre of land is £1,000, and interest rates are 5%, the price of the land will be £1,000 x 20 = £20,000. However, if interest rates rise to 10%, the price of the land will fall to £1,000 x 10 = £10,000. 

As Marx points out in Capital III, Chapter 48, it is not the money-lending capitalist or landlord that exploits the worker, even though both of these share in the surplus value produced by the worker. Neither of these classes of exploiter have any direct relation to the worker, in this regard. The relation is between the worker and industrial capital. The money-lending capitalist and landed property, in turn, have an exploitative relation to industrial capital.

“Just as the operating capitalist pumps surplus-labour, and thereby surplus value and surplus-product in the form of profit, out of the labourer, so the landlord in turn pumps a portion of this surplus-value, or surplus-product, out of the capitalist in the form of rent in accordance with the laws already elaborated.”

In contrast, when interest rates fall, therefore, this coincides with a strengthening of the position of money-lending capital, and landed property as against productive-capital. For example, a large part of the reason for the rise in inequality of wealth, highlighted by the recent Oxfam Report, is the extent to which there has been a growth in this fictitious wealth at the expense of real productive wealth.

Whilst, there has been a significant rise in productive-capital, since the start of the new long wave boom, in 1999, this lags way behind the astronomical rise in fictitious wealth that has occurred over the last 30 years. During the period of long wave Winter, between 1987-1999, productive-capital accumulated only slowly, during a period of intensive rather than extensive accumulation. The rising rate and mass of profit during this period, released large amounts of capital, which was transformed into loanable money-capital, as well as rents. It pushed down global interest rates in a long secular trend, as huge sums of loanable money capital flooded into financial markets to buy shares, bonds and property.

This kind of phenomenon of rapidly rising prices for financial assets, at a time of sluggish economic activity, is therefore, quite common. In the period between 1980 and 2000, US GDP rose by 250%, whereas the Dow Jones rose by 1300%! By comparison, between 2000 and 2012, US GDP rose by 52%, whereas the Dow rose by only 16%. This huge rise in the price of bonds and shares over the last thirty years, has been the main reason that workers pension schemes have gone into crisis, because these higher prices meant that their monthly contributions bought fewer and fewer shares and bonds, whilst the yield on those shares and bonds, out of which the actual pension payments are made, continued to fall.

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