In the initial stages of capitalist development, the rate of profit can play an important role in determining the pace of investment and accumulation. For the kinds of reasons described above, the owners of capital will seek to employ it wherever the rate of profit is highest. But, for a number of reasons, when capital takes on mammoth proportions, this role of the rate of profit becomes less important, and instead it is the mass of profit that becomes more determinant. Briefly, those reasons are that the individual private capitalists abandon their social role in production, to the professional managers.
This has two obvious effects. Firstly, the private capitalists become money-lending capitalists, so rather than needing to increase their ownership of physical capital in one sphere rather than another, they simply need to shift their ownership of shares or bonds in one company or one industry to another. The money-capitalists are not directly interested in the rate of profit, but in the rate of interest, the yield they can obtain on their money-capital. In fact, as Marx describes in Capital III, they come to believe that it is only this loanable money-capital that is really capital, and that its ability to earn interest is some inherent characteristic of it, profit being reduced, in their eyes, to being merely a form of wages paid to the managers.
Secondly, the actual functioning capitalists, the professional managers (as opposed to the CEO's and other directors put above them, by the money-capitalists, to look after their interests) are tied, like other workers, to the particular business or industry. In just the same way that a potter tends to be tied to working in the pottery industry, so a production line manager in the industry, who has acquired the specialist knowledge, to perform that function, also tends to be tied to it. They live in the area like all other workers, their kids go to school in the area, their pension is tied to the company and so on.
As a result, their concern is for the longer term future of the business, not with simply maximising a return on money-capital. The latter is the concern of the CEO's etc. who look after the interests of the shareholders, and who themselves have no tie to the business, frequently moving within a matter of a few years to some other business, and often some other industry. But, also with the size of the productive-capital itself becoming mammoth, it is simply not possible to dismantle it, and use it in some other industry, just because a higher rate of profit is available. However, as Marx also points out, beyond a certain mass of capital, a low rate of profit makes possible a much greater accumulation of capital than a high rate of profit on a small mass of capital.
Finally, in the initial period of capitalist development, relatively small masses of profits meant that a large proportion of it was consumed unproductively by the capitalist and their family. In other words, a large part of social reproduction is merely simple reproduction. As the mass of profit grows exponentially the proportion required to meet the consumption needs of capitalists gets smaller and smaller, leaving an increasing proportion available for productive investment. As Marx points out, with socialised capital, in the form of joint stock companies, the huge mass of capital, only requires a low level of interest on it, to provide the owners of the shares and bonds with astronomical incomes, leaving the rest available for productive investment.
If the mass of profit is rising, in these large industries, therefore, it will tend to encourage expansion, but the same rise in the mass of profit, may also provide the money-capital required to finance it. If the mass of profit is rising, at a time when the cost of the commodities that comprise the constant capital is falling – and the two things may be related, as newly introduced technologies may be causing productivity to rise sharply – then the mass of realised money profits may grow much faster than the demand for money-capital, to purchase these increasingly cheaper components of constant capital. The same process may also be reducing the value of labour-power, so less capital has to be advanced for it too. The consequence is then that the supply of loanable money-capital rises relative to its demand causing interest rates to fall. That is precisely what has been seen during the 1990's, and into the 21st century, as large amounts of productive investment was accumulated, and yet, massive hoards of money were also created, pushing global interest rates down to levels last seen 200 years ago.
In the 1960's, the global economy was marked by more or less full employment in the developed economies. It meant that the demand for labour-power rose relative to its supply pushing wages higher. One cause of this is that the new technologies developed in the mid 1930's, which were introduced after WWII, bringing about a sharp rise in productivity, and also bringing a range of new industries in motor cars, consumer electronics and petrochemicals, now formed the standard technology of the time. These industries themselves had been the new high profit areas in the post war period. Labour and capital had moved towards them, just as it had left industries like coal mining and agriculture. By the 1960's, the investment in car factories, was no longer a higher profit alternative to coal production, but an additional investment alongside the existing car production. Wages rose, as labour productivity declined, or at least slowed. It caused a squeeze on profits that became increasingly manifest during the 1970's, leading to intensified industrial disputes.
Capital is always introducing new technologies alongside existing technology, but as Marx points out there are periods when the pace of development of new technologies, and of their introduction is much greater than at others. For example, in “Value, Price and Profit”, Marx points to a situation in the 1850's similar to that of the 1960's. Agricultural wages had been rising since 1849, as the long wave boom of that time caused the demand for labour-power to rise. Marx points out that capital responded by introducing machines and other techniques, but its clear that during that period it was not on a sufficient scale to undermine the demand for labour-power as wages continued rising through 1859. It was only in the 1860's, as the long wave cycle turned that unemployment rose, and wages fell.
Similarly, in the 1970's, capital began to look more intensively for technological solutions to the shortage of labour-power. The peak of that search arose in the mid 1980's. In the intervening period, a range of new technologies, based largely on the microchip began to be introduced, primarily in technology to replace labour. I remember in the mid 80's, as an IT consultant, doing some work for an engineering firm that had already introduced computer controlled lathes and milling machines. A comrade of mine, at the time, worked as a technical author for ICL, and he told me that he was working on the development of programmes that would themselves create the software that would control the machines.
It saw the introduction of cheap photocopiers including colour, of computer controlled typesetting and so on that undermined the craft unions in the printing industry. It was not just in manufacturing that this technology created a relative surplus population. The introduction of word processors revolutionised the office. The personal computer revolutionised functions such as payroll, and book-keeping, as well as stock control, and set in motion the revolution in banking, which in the 1990's led to large scale redundancies of bank staff from the tellers all the way up to bank managers.
Many people will be unaware of a world prior to the mobile phone or Internet, but these are new phenomena, which again revolutionised production and circulation during the late 1990's. Yet, as I have pointed out previously, in relation to “Apple”, there are clear signs that, just as happened in the 1960's, these once revolutionary technologies have now become the standard technology. Even Apple's watch is really just a new version of existing technologies. Its products overall begin to cannibalise the demand for its other products, as well as facing increasing competition from other suppliers of similar products, which in an increasingly saturated market, leads to an inability to raise prices, and squeezed profit margins.
A look at the graph of copper prices since WWII, shows a similar pattern. Prices shoot up (1945-57) as supply cannot rise to meet sharply increased demand. Following a period of investment to open new mines and so on, supply eventually expands rapidly, causing a glut, which pushes prices down (1957-60) until the glut is absorbed. Then as demand continues to expand as industrial investment proceeds extensively, copper prices rise again, as these new mines themselves face rising costs. A similar pattern can be seen currently with oil prices.
Profits during this period get squeezed then from three sources. Firstly, wages rise causing the rate of surplus value to fall, as productivity fails to rise sufficiently to either reduce unit labour costs, or to replace labour on a sufficient scale. Secondly, the price of raw materials, rises, as demand for them rises, whilst existing mines and so on, face rising costs, caused by diminishing returns, higher labour costs, reduced productivity and so on. Thirdly, many commodities that were new in the previous phase, are now mature with increased competition from additional producers, so the ability to raise prices is limited.
A look at current conditions shows that many of these features can already be seen. China has seen rapidly rising wages, as its apparently vast labour supplies began to be used up. Chinese firms have even been looking to utilise cheaper, more plentiful labour supplies in Vietnam, Indonesia and Africa. The US has seen unemployment drop to the level of more or less full employment, with labour shortages in a number of areas, and with wages rising rapidly, including hikes in the minimum wage. A similar thing can be seen even in the UK's sclerotic economy.
The sharp rise in the prices of copper oil, food and other primary products was seen in the early 2000's, and the subsequent splurge of investment – for example fracking, huge investment in mines in Central Asia, Africa etc. and in new industrial farms in Africa – led to the over supply of many of these commodities and price falls. Oil prices dropped 60%, and a global milk glut means a litre of milk is now cheaper than a litre of water.
As I set out recently, this very process has meant that some of those primary producers, and those that enjoyed high levels of rent, based upon surplus profits, have now seen those surplus profits disappear. These were previously sources of large amounts of loanable money-capital thrown into global capital markets, which have now become borrowers of money and money-capital to be able to continue to finance their state budgets. Both developed and developing economies also need to borrow money to finance investment in infrastructure, without which their economies will not be able to compete globally, no matter how much investment is put into individual enterprises or industries. 21st century technology industries based around the Internet, digital media and so on, cannot function efficiently in an economy whose Internet and telecommunications infrastructure is still based upon late 20th century standards. Nor can it recruit the labour it requires, unless adequate resources have been put into education and training.
As profit margins get squeezed, and labour shortages begin to be felt, capital will once more need to turn towards investment in research and development to gain competitive advantage both to reduce costs, and to develop new products that can be sold at higher margins, and to capture market share. In the meantime, those squeezed margins with heightened competition, sparks a new drive for a renewal of the process of concentration and centralisation of capital. The 1960's was also the period of the development of the conglomerate, as firms bought up their opponents capital, as well as trying to squeeze them out of the market place by a continual expansion of their output.
We have seen recently a similar round of mergers and acquisitions, and there seems to be a turn away from the use of financial resources for share buybacks towards the use of those resources for acquisitions. The money-capitalists seem themselves to have realised that ultimately their interest payments, whether in dividends or bond interest, rely on productive capital producing profits, and ultimately increased masses of profits depend upon increased masses of productive-capital.
To the extent that firms use an increased portion of realised profits to finance expansion internally, that reduces the mass of loanable money-capital thrown into the money market, and thereby causes interest rates to rise; to the extent that firms issue new shares to finance any expansion, that increases demand for loanable money-capital, causing interest rates to rise. With a greater supply of shares in the market the price of each individual share tends to fall, increasing the yield on the share. To the extent that firms issues bonds to raise money-capital for expansion, the same thing applies, the supply of bonds rises, causing their price to fall, and the yield on each bond to rise.
This process of rising yields has been seen across the global economy for some time. It can be seen in the sharp rises in interest rates that has occurred in Russia, Brazil, South Africa and other emerging economies. It can also be seen in the huge rates of interest charged in the market for ordinary borrowers, for example, charge by the pay day lenders. But, even the interest rates charged on ordinary loans, mortgages and so on, bear no relation to the near zero rates that the banks pay to borrow from the central bank.
Part of the reason for that has been the effect of quantitative easing, whereby those central banks have printed money and used it to buy certain bonds, thereby artificially raising their price, and reducing their yield. Another part of the reason is that, because of that underpinning, loanable money-capital has been drawn to those bonds, on the prospect not of obtaining yield, but of securing capital gain. Other money-capital has been drawn to those bonds from elsewhere in the globe, during a period of uncertainty, on the basis of protecting capital from default.
With the prospect of such a default now very real in the heart of Europe, that is no longer such a certainty. One reason that the recent movements in yields have been so sharp is that the bond market is not as liquid as the equity markets. When the real movement of capital occurs, many will head for the door, only to find that its only a window. The financial markets are in a much more fragile and dangerous condition today than they were in 2008. As I point out in my book, when this crisis unfolds, it will be much more severe than 2008, and there will be no possibility of halting it simply by printing money, and nationalising the banks. Only a massive destruction of fictitious capital values, reducing stock markets and property markets by around 80%, will create the basis for recovery.
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