Monday, 31 August 2015

Capital III, Chapter 14 - Part 1

Counteracting Influences

In setting out the basic processes that create a tendency for the rate of profit to fall, which simultaneously causes the mass of profit to rise, Marx outlined the way these very same processes also result in a tendency for the rate of profit to rise. So, the basis of the tendency for the rate of profit to fall is that the total value of constant capital rises relative to the total value of variable capital. But, the means by which this comes about is technological change. New, more efficient means of production raise the productivity of labour, so that a given quantity of labour can process a greater quantity of material.

However, this very same process also creates a tendency for the rate of profit to rise. Firstly, it means that a smaller quantity of fixed capital is required relative to the quantity of material processed, because one new machine replaces several older machines. Secondly, this same process also reduces the value of that fixed capital, which, because it must always be present for production to take place, must always be included in the advanced capital. The combination of a relative fall in the quantity of fixed capital, and an absolute fall in its value, is a powerful factor, therefore, in creating a tendency for the rate of profit to rise, which counteracts its tendency to fall. Thirdly, this same rise in productivity causes the value of the circulating constant capital to fall, though in respect to material this frequently occurs in steps, only after new production has been established. It is frequently only as an average market price, over many years, that this can be observed, as market prices remain high during periods of under supply, and then fall to below prices of production, during periods of over supply.

So, although the quantity of material processed increases, the total value of that material may rise by only a small amount, remain the same, or even fall as a result of the fall in the value of the material itself. Moreover, changes in technology and technique may also result in the material itself being used more efficiently, so that even a relatively smaller quantity of it is consumed. For example, improvements in steam engine technology continually resulted in more power being produced with smaller amounts of coal consumed to produce it. The same thing is seen today. Global GDP has risen by seven times the increase in oil consumption, since the 1980's, as technology has improved the way oil is used to produce energy.

One microchip replaces millions of these.
A similar thing occurs with the use of other materials, so, for example, Marx details the way waste was reduced, or used in production itself. In addition, existing materials can be replaced by cheaper or more effective alternatives. That is the case with synthetic fibres, for example. But, a significant example is in relation to electronic goods. Originally, these depended on expensive electric valves that themselves required a lot of material to produce. But, these were replaced by much cheaper and more effective transistors, which required very little in the way of material for their production. These in turn were replaced by printed circuit boards that required even less in terms of material, and increased efficiency by massive amounts. In turn, the introduction of microprocessors has improved efficiency by qualitatively larger magnitudes, with the use of even less material. I don't know if anyone has attempted to make the calculation, but its likely that were it possible to produce today's computers and other devices using valves rather than microchips, the world's glass industry would be kept busy just producing the glass required for the volume of valves needed.

These huge reductions in the quantity of materials used, and in the value both of the fixed and circulating constant capital, thereby create a powerful tendency for the rate of profit to rise.

Fifthly, the same processes also result in significant falls in the value of wage goods, which causes the value of labour-power to fall and relative surplus value to rise. The increase in the rate of surplus value, therefore, also creates a tendency for the rate of profit to rise.

Sixthly, the increase in productivity reduces the production time and circulation time of capital so that the rate of turnover rises, thereby causing the annual rate of profit to rise.

Finally, these same processes result in the creation of new industries, where the organic composition of capital is lower and of profit is higher.

Sunday, 30 August 2015

Capital III, Chapter 13 - Part 16

The proportion of value added by living labour in each individual commodity unit, and, therefore, the proportion of profit can rise, if productivity increases so as to reduce the value of the constant capital relative to the variable capital. This is particularly the case in relation to the fixed capital. If a new machine is introduced, which is twice as productive as existing machines, then, as set out in Capital I, the result is to cut the value of existing machines in half. Because the value of the machine is reduced by 50%, the amount of value it transfers to commodities, via wear and tear, is also thereby cut by 50%. For the new machine, because it is twice as productive as the old, the amount of value it transfers, via wear and tear, to each commodity unit is already half what the previous machine transferred.

As Marx set out in Chapter 6, this kind of change, for raw materials, tends to occur in step changes. It takes a prolonged period of high market prices before copper miners will commit to the cost of developing a new copper mine, or before new areas of land are opened up to new farms, as is happening now in Africa, as it happened, in the US, in the 19th century. But, when these new sources of supply do come on stream, their production costs are usually a fraction of those of existing producers. Moreover, it is frequently the case that the previous period of under-supply, which caused market prices to exceed prices of production, is then matched by periods of over-supply, when market prices undershoot prices of production.

“In no case does a fall in the price of any individual commodity by itself give a clue to the rate of profit. Everything depends on the magnitude of the total capital invested in its production.” (p 230)

The fall in the price may result from a fall in the value of the constant capital used in its production – either the fixed capital or the circulating capital. In that case, the fall in price would coincide not with a fall, but a rise in the rate of profit. The falling price may result from changes in productivity, so that a given amount of labour processes a larger quantity of material, so that although the material costs remain the same per unit of output, less is comprised of wages and profit. In that case, the rate of profit would fall.

“The phenomenon, springing from the nature of the capitalist mode of production, that increasing productivity of labour implies a drop in the price of the individual commodity, or of a certain mass of commodities, an increase in the number of commodities, a reduction in the mass of profit on the individual commodity and in the rate of profit on the aggregate of commodities, and an increase in the mass of profit on the total quantity of commodities — this phenomenon appears on the surface only in a reduction of the mass of profit on the individual commodity, a fall in its price, an increase in the mass of profit on the augmented total number of commodities produced by the total social capital or an individual capitalist. It then appears as if the capitalist adds less profit to the price of the individual commodity of his own free will, and makes up for it through the greater number of commodities he produces. This conception rests upon the notion of profit upon alienation, which, in its turn, is deduced from the conception of merchant capital.” (p 230-1)

Profit upon alienation is a term developed by Sir James Steuart,
and discussed by Marx in Theories of Surplus Value. It refers to the profit, particularly merchant capitalists obtain, from the sale of commodities, as opposed to the surplus value created in production. Specifically, it means the profit obtained from the selling of a commodity above its value. This notion of the source of profit developed by the Mercantilists, although it can explain why this or that capital obtains a profit, or a higher or lower profit, cannot explain the source of profit in general, for the reasons Marx sets out in Capital I, i.e. if every commodity owner sold their commodity at say 10% above its value, they rob each other by the same amount, so it would be the same as if they simply sold them at their value.

Yet, it seems to each capital that this is precisely what they do, i.e. they take their cost price and add a percentage for profit. How much they can add appears to be simply a question of the state of demand for the particular commodity, or their particular skill in reducing the cost price. It may also seem, as Marx says, that the ability to obtain a greater mass of profit arises from the decision to adopt a lower profit margin so as to maximise demand. The mass of profit then seems to be a function of multiplication, i.e. it is the profit margin multiplied by the quantity of units sold, whereas the reality is that it is a process of division. It is the mass of profit, which is divided by the units sold, which determines the profit margin on each unit.

In order to produce at the least cost, the capitalist must produce in the proportions determined by the technical composition of capital, and the technical constraints discussed in Capital I, in relation to the minimum size of capital. Given the available capital of each firm, this then determines the quantity they will produce. The produced surplus value will then be equal to the value of this level of output minus its cost of production. The surplus value per unit is then equal to this amount divided by the number of units.

But, each firm sees this reality reflected through the lens of competition. Having determined its optimum level of production, it must deal with the issue of demand, which continually fluctuates with consumer preferences. Its objective, therefore, is to realise as much of the produced surplus value as possible, within the constraints of that demand, by charging the highest price possible, compatible with selling all of its output.

In reality, therefore, this aspect of maximising profit has nothing to do with the skill of the individual capitalist. The conditions for producing at the most efficient, least cost level are technically determined, whilst the level of demand for the commodities is determined not by the producer but by the consumer.

“The fall in commodity-prices and the rise in the mass of profit on the augmented mass of these cheapened commodities is, in fact, but another expression for the law of the falling rate of profit attended by a simultaneously increasing mass of profit.” (p 231)

Marx also comments that the rise in productivity that results in this increase in the mass of commodities produced and a fall in their individual value, does not change the value of labour-power, and rate of surplus value, unless these commodities are wage goods. But, in reality, other than perhaps luxury goods, all commodities enter in some way into the production of wage goods. If the price of a machine falls, this is not itself a wage good, but, to the extent that the machine is used to produce wage goods, or even just to produce materials or fixed capital used in the production of wage goods, it thereby indirectly affects the price of wage goods.

Moreover, as Marx set out in the previous chapter, the market price of any commodity, under capitalism, is not determined in isolation from all other commodities, precisely because it is a function of its price of production, which depends upon the average rate of profit.

Those capitalists who operate with the latest technology and techniques, but which have not yet been widely adopted, as was seen in Capital I, are able to sell at a market price above their individual price of production, and thereby to obtain a profit above the average until such time as competition reduces it.

“During this equalisation period the second requisite, expansion of the invested capital, makes its appearance. According to the degree of this expansion the capitalist will be able to employ a part of his former labourers, actually perhaps all of them, or even more, under the new conditions, and hence to produce the same, or a greater, mass of profit.” (p 231)

Forward To Chapter 14

Saturday, 29 August 2015

Friday, 28 August 2015

Friday Night Disco - Who's That Lady - The Isley Brothers

Capital III, Chapter 13 - Part 15

As Marx and Engels point out, the bourgeoisie calculate the rate of profit on the basis of the laid out capital, rather than the advanced capital, because this invariably produces a lower rate of profit. In the national accounts, of capitalist economies, the data is provided on the same basis, of the laid out capital, i.e. the cost prices, and so any calculation of the rate of profit also replicates this error, and grossly understates both the real annual rate of profit, and the rise in that rate resulting from the continual rise in the rate of turnover. Unfortunately, most calculations of the rate of profit, even by Marxist economists, are undertaken on this basis, and thereby replicate the error. (See:The Rates of Profit, Interest and Inflation)

Marx then makes another important point, in relation to the calculation of the rate of profit, which is that the rate of profit must be understood as a rate based on the advanced productive-capital. The rate of profit cannot be meaningfully understood on the basis of the money-capital, or the historic prices paid for the elements of productive-capital, because, for Marx, the rate of profit is nothing other than an index of the self-expansion of the productive-capital itself.

“The rate of profit must be calculated by measuring the mass of produced and realised surplus-value not only in relation to the consumed portion of capital reappearing in the commodities, but also to this part plus that portion of unconsumed but applied capital which continues to operate in production.” (p 229)

As productivity rises, the value of each individual commodity unit falls. It contains less labour, both materialised labour (constant capital) and living labour (variable capital plus surplus value). This is so even as the total mass of commodities produced, and so the total value of this mass, itself rises. But, profit is only a part of the new value added by living labour. If the amount of living labour in each commodity unit falls, then so does the amount of profit. This tendency is offset by the fact that the rate of exploitation rises, but only within limits. In other words, if the amount of value added by living labour in each unit falls from 5 minutes of labour-time (say £0.05) to 3 minutes of labour-time (£0.03) then the mount of profit per unit could still rise, if the rate of exploitation rises from 40% (£0.02 per unit) to 70% (£0.021 per unit).


“In all these cases — which, however, in accordance with our assumption, presuppose an increase of constant capital as compared to variable, and an increase in the magnitude of total capital — the individual commodity contains a smaller mass of profit and the rate of profit falls even if calculated on the individual commodity. A given quantity of newly added labour materialises in a larger quantity of commodities.” (p 229)

But, as Marx points out, the mass of profit grows if more labour-power is employed, or if the same quantity is employed at a higher rate of surplus value. But, the process which leads to a higher organic composition of capital, is also the same process which sees the accumulation of capital. Although the value of the variable capital falls, relative to the constant capital, the absolute quantity of and value of the variable capital continues to expand. It is this fact which leads to the increase in the mass of profit, and the accumulation that flows from it.

This is particularly the case in respect of the total social capital. A particular capital may reach a stage where labour is replaced on such a scale that the quantity employed falls absolutely. But, the profits generated lead to the expansion of the total social capital, in other spheres, where additional labour-power is then employed. That is why it is frequently the case that even when unemployment is rising, employment, i.e. the actual number of people employed, is also rising, as part of the normal expansion of capital.

Thursday, 27 August 2015

Capital III, Chapter 13 - Part 14

Looking at the rate of profit at the level only of the individual commodity/industry, therefore, Marx says,

“Outside of a few cases (for instance, if the productiveness of labour uniformly cheapens all elements of the constant, and the variable, capital), the rate of profit will fall, in spite of the higher rate of surplus-value, 1) because even a larger unpaid portion of the smaller total amount of newly added labour is smaller than a smaller aliquot unpaid portion of the former larger amount and 2) because the higher composition of capital is expressed in the individual commodity by the fact that the portion of its value in which newly added labour is materialised decreases in relation to the portion of its value which represents raw and auxiliary material, and the wear and tear of fixed capital. This change in the proportion of the various component parts in the price of individual commodities, i.e., the decrease of that portion of the price in which newly added living labour is materialised, and the increase of that portion of it in which formerly materialised labour is represented, is the form which expresses the decrease of the variable in relation to the constant capital through the price of the individual commodities.” (p 226-7)

However, Marx points out that even at the level of the individual commodity, if we calculate the effect on the basis of the price of the commodity, we will again be led into error, because of the difference, demonstrated previously, of calculating the rate of profit on the laid-out capital rather than on the advanced capital. In other words, a failure to take into consideration the rate of turnover of capital, which itself must rise alongside the same causes that raise the organic composition.

The rate of profit that Marx is referring to here is s/c+v, which is the same as the profit margin, which can also be written as p/k, where p is the profit, and k is the cost of production. This is made clear by Marx in Theories of Surplus Value, Chapter 16, where he writes,

"{Incidentally, when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus-value which is seized in the first place by the industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent). Thus here the rate of profit is equal to surplus-value divided by the capital outlay."

But, Marx and Engels specifically distinguish between the "capital outlay", and the capital advanced. The capital advanced, is the capital advanced for one turnover period, whereas the capital outlay is the total amount of capital laid-out during the year. As Engels describes in Capital III, Chapter IV, and as Marx himself refers to in Chapter 13, the rate of profit is calculated on the laid-out capital, whilst the real rate of profit, or annual rate of profit is calculated on the advanced capital. Two completely different figures and sets of conclusions arise from these different rates of profit, as will be demonstrated.

If the rate of profit is calculated on the basis of the cost-price of commodities, p/k, i.e. on the basis of the laid-out capital, for the year, then the rate of profit can only be the same as when calculated on the basis of the advanced capital if the advanced capital is only turned over once during the year. This is very unlikely. Moreover, the cause of the rise in the technical composition of capital, which brings about a rise in the organic composition of capital, is the rising social productivity of labour. But, it is that same rise in productivity which continually reduces both the production time and the circulation time of capital, thereby continually increasing the rate of turnover of capital, and the annual rate of profit along with it.

Engels gives three examples to demonstrate. In the first, a capital of £8,000 produces 5,000 pieces, sold at £1.50 each. The cost price of each piece is £1, leaving £0.50 as profit. The assumption Engels makes here is that the circulating capital is turned over just once during the year, so the laid out capital is £1 x 5,000 pieces = £5,000. If we calculate the rate of profit on this laid out capital, it is then equal to the profit (5,000 pieces x £0.50 = £2,500) divided by the laid out capital of £5,000. It is then 2500/5000 = 50%. But, the total advanced capital is not £5,000 but £8,000, presumably because, although Engels does not specify it, the firm employs a further £3,000 of fixed capital. If we calculate the rate of profit on the total advanced capital, it is then 2500/8000 = 31.25%.

In the second example, the capital rises to £10,000, and symptomatic of the rising social productivity of labour, the capital produces twice as many pieces – 10,000. The commodity has a cost price of £1, and is sold at £1.20 per piece giving a profit per piece of £0.20. The laid out capital is then 10,000 x £1 = £10,000, and the profit is 10,000 x £0.20 = £2,000. The rate of profit calculated on p/k is then 2000/10,000 = 20%. The total advanced capital, in this case, was also £10,000, and so the rate of profit, calculated p/C is also 20%.

In the final example, the total advanced capital is £15,000. Again reflecting the growing productivity of labour, this larger capital produces now 30,000 pieces in a year. The cost price per piece is £0.65, giving a total laid out capital for the year of £19,500. In other words, the laid out capital here is greater than the advanced capital, by £4,500. The reason for this is that the circulating capital turns over more than once during the year.

In other words, of the firm's £15,000 of capital, £10,000 may be in the form of fixed capital, with just £5,000 of circulating capital. It is only the circulating capital plus the wear and tear of the fixed capital that goes into the cost price of the commodity. In that case the laid out capital of £19,500 may represent approximately three turnovers of this advanced circulating capital.

The profit per piece is £0.10 which means the total profit is 30,000 x £0.10 = £3,000. The rate of profit calculated on the laid out capital is then 3000/19500 = 15.38%. But, calculated on the advanced capital of £15,000 3000/15000 = 20%.

In other words, the higher the rate of turnover of capital, the higher the annual rate of profit. But, we know that the same processes that lead to a higher technical composition of capital also result in this higher rate of turnover of capital, and therefore, a higher rate of profit. We know too as Marx sets out that these same processes lead to a relative reduction in the proportion of fixed capital to circulating constant capital because these processes mean that in addition to the devaluation of fixed capital, via moral depreciation, technological development means that one new machine replaces several older machines etc. As the proportion of fixed capital to circulating constant capital falls, so this gives a powerful boost to the rate of turnover of capital, and, therefore, to the rate of profit.

This reality is usually missed in calculations of changes in the rate of profit, because the rate is usually calculated on the basis of the laid out capital, p/k, rather than on the advanced capital, p/C, or more correctly s x n/C, where s is the surplus value for one turnover period, n is the number of turnovers during the year, and C is the advanced capital for one turnover period.

When this continuous increase in the rate of turnover of capital is taken into consideration, it can be seen why it acts as a necessary and powerful force leading to a rise in the annual rate of profit.

Wednesday, 26 August 2015

Central Banks Are Now Impotent

A lot of emphasis is being placed on the role of central banks in stopping the current financial market crashes, as well as in preventing economies sliding into recession. In reality, central banks have never been able to achieve the latter aim, and because they have acted to blow up the bubbles in property and financial markets, so many times in the past, that are now bursting, they have now put themselves in a position where they can no longer achieve that aim either. The air in their own tanks has been used up, so they have none left to puff more into those bubbles. It is a fact that the Governor of the Indian central bank, Raghuram Rajan, has pointed out in recent days.

In fact, it has been the action of central banks, over the last 30 years, in putting a floor under those financial and property markets – the so called Greenspan Put – that has created this condition. Conservative governments, particularly in the US and UK, sought to create an economic model based upon low wages and high private debt, with the latter being the other side of rapidly inflating asset prices, which in turn provided collateral for yet further borrowing. It was the model developed by Margaret Thatcher in Britain, and Ronald Reagan in the US.

Despite North Sea oil revnues, the deficit to GDP ratio
was much higher during the Thatcher/Major governments
than under the last Labour government, as Thatcher used
high levels of unemployment to smash the unions, and
thereby reduce wages.
In the UK, for example, at the same time that Thatcher used North Sea oil revenues to finance a massive rise in unemployment, so as to smash the unions, and workers' ability to resist pay cuts and job losses, she also deregulated financial markets so that banks and finance houses could lend without end, to people whose falling wages were increasingly going to be incapable of repaying the resulting debts. Whilst ordinary people's incomes were falling, they were deluded, by this policy, into believing that they were simultaneously becoming more wealthy, because the value, on paper, of their house was going through the roof, and if they had money in shares or bonds, they were going through the roof too – until, of course they didn't as in 1987 with the stock market crash, 1990 with the property market crash, 1994 another stock market crash, 2000 another stock market crash, 2007/8 another property market crash and 2008 yet another stock market crash.

But, the model required that these property and financial market crashes could not be allowed to do what they have always done in history, which is to clear away these bubbles, because that would prevent ordinary people from borrowing even more, going even further into debt, and without that, consumer demand, in economies that rely on high levels of consumer spending, would have collapsed. It would have meant that wages would have to rise, which would have undermined the model. In the UK, in the early 1980's, everyone had been encouraged by Thatcher to take on personal debt to buy their council house. Single people were given the idea that they must “get on the property ladder”, to accrue wealth out of thin air (unlike their parents who had lived at home with their parents, usually well into their 20's, and actually saved money, so as to be able to buy a house when they got married). They were missold pensions by Thatcher's newly deregulated financial services industry, and sold shares in the various privatisations and so on.

So, when in 1987, global stock markets crashed by more than 25% in a single day, this rather upset the scenario of ever rising wealth from nowhere that Thatcher and Reagan, and the other proponents of the magic of money, were trying to sell. Step into the picture, Alan Greenspan, newly minted Chairman of the US Federal Reserve. Greenspan was a devotee of Ayn Rand, and so also a proponent of “sound money” based on gold. Well, the US had already dismantled any connection of the dollar to gold – actually it should be gold to the dollar, because the price of gold had been fixed at $30, at Bretton Woods – in 1971, when Nixon, answered De Gaulle's requirement to have France's debts paid in gold, by removing dollar convertibility to gold, and making it illegal for US citizens to hold gold.

Greenspan, as the global capitalist system appeared to be disappearing down the plughole of the financial markets, ignored his commitment to “sound money”, and stepped in to slash interest rates, flood the economy with liquidity, and thereby brought the panic to a halt. In the following year, financial markets not only recovered the losses from the crash, but rose by 50%! It appeared that money magic could cure all ills after all, just as Milton Friedman and the Monetarists had claimed. It reinforced the idea that the economy could be tweaked using monetary levers, rather than the Keynesian fiscal levers that had been the orthodoxy from 1945-74.

But, rather like a game of whack-a-mole, having stopped the stock market crash by devaluing the currency, the consequence was, in Britain, to simply inflate another bubble. Between 1988-90, house prices more or less doubled. Then, in 1990, with inflation rising, and the UK also entering another recession, house prices crashed by 40%, taking them right back down to where they had been in 1988! Of course, hundreds of thousands of people who had bought at the top of the market, including tens of thousands, who had bought council houses, found they could not pay their mortgages, which had doubled, as mortgage rates rose, whilst they could not get back what they had overpaid for the house, because it was now worth only half what they had borrowed to pay for it! Tens of thousands of people were evicted, at a time when also Thatcher's policy had prevented the provision of alternative housing to accommodate them.

But, that set the scene for the period up to now. In 1994, as the Federal Reserve attempted to raise official interest rates, it sparked yet another stock market crash, as the price of bonds sold off, and interest rates spiked. In 2000, following the financial crisis in Asia and Russia, and with the potential for a further financial crisis, as a result of fears of the Millennium Bug, the Federal Reserve pumped yet more money tokens into circulation, which further fuelled the bubble in shares, particularly technology shares that had been running since 1995. The NASDAQ index, which had been rising by amounts of up to 70% a year, similar to the recent rise in the Shanghai Composite Index, fell in March 2000 by 75%. Fifteen years later, it briefly got back above its 2000 level, only to once again now fall back below it. So much for the idea, that shares or property always rise over the longer term. In fact, it was not until the mid 1950's, that US shares recovered the levels they had achieved prior to the 1929 stock market crash, and for most people that is too long a time-scale to have to wait, for it to do you any good.

Central banks have a role in providing liquidity into the economy to prevent a credit crunch similar to that which arose in 2008, or as Marx describes as happened in 1847 and 1857. But, that is all. They need to provide the currency required to enable the real economy to function, so that commodities can continue to circulate. But, they have no requirement to keep pumping liquidity into the economy to reflate crashed financial markets, and to the extent they do, they undermine both their own function, and the real economy. On the one hand, by reflating property and financial markets, they prevent the proper functioning of the market in clearing out excesses. There is clearly no rational basis for either stocks or property to be at the ludicrously high levels to which they have been pushed over the last 30 years.

That fact alone has meant that workers' housing and pension costs have been massively increased, which raises the value of labour-power, and cuts the rate of surplus value and profits. But, it also, as Haldane has noted, leads to a situation where the owners of fictitious capital are led to believe that this is a never ending upward spiral. Instead of money-capital being used to accumulate productive-capital, and thereby increase the mass of profits out of which interest payments can be made, it simply goes into fuelling ever more speculation, in the buying of existing financial assets at ever higher, and unsustainable prices. The two things are directly contradictory. The more money-capital goes into speculation, the less goes into accumulating real capital to produce the profits, which finance the payment of interest to justify the holding of fictitious capital! As Haldane puts it, “capital eats itself”.

QE was justified on the basis that it was needed to prevent global economies going into recession, but it could never have achieved that. The best it could do was to prevent a credit crunch sending the global economy into a recession. But, the amount of liquidity required for that, and the duration of such intervention, is very limited, whereas the extent of QE has been more or less unlimited. Had central banks allowed stock and property markets to crash in 1987, and not repeatedly intervened to reflate them, on every subsequent occasion, when they inflated, the current financial crisis would not have arisen.

That has been apparent in relation to the recent bubble in the Chinese markets, where there are numerous stories of individual producers who have diverted their available money-capital to stock market speculation that they would otherwise have used to expand their productive-capital. But, it is also visible in relation to major corporations, whose top directors over recent decades have focussed most of their attention on using profits for various forms of financial engineering to boost share prices, rather than in expanding the actual business.  That is because those directors are the representatives of fictitious capital not productive-capital.  They promote the interests of shareholders not the business itself.

QE could never prevent recessions, it could only act alongside Keynesian fiscal stimulus to increase the level of aggregate demand in the economy. In the 1980's and 90's, monetary policy and the encouragement of additional private debt acted to counter the drop in wages that Thatcher's economic model required, and the low productivity economy that followed from it. But, that was always going to be a time limited solution, because once the levels of private debt reached levels at which those individuals could no longer realistically either pay back the debt, or take on additional higher cost debt, the only answer is default. It is what has led on the one hand to the development of the large number of Pay Day lenders, and on the other to such a large number of people being in debt to them.

So, the policy of trying to promote aggregate demand by loose monetary policy and an encouragement of debt, alongside a policy of austerity, under current conditions, is bound to fail, and is failing. In fact, the growth that does exist in the global economy is despite rather than because of central bank and government policies. On the one hand policies of austerity take demand out of the economy, and cause uncertainty. On the other, monetary policy is encouraging speculation and draining money from productive investment, which would add both demand and capacity, provide jobs and income and profits.

What is more, not only is the monetary policy damaging real economic growth, but it is not now capable of even reflating financial bubbles. The Chinese central bank has cut official interest rates five times this year, but the Shanghai Composite continues to crash. The Federal Reserve and Bank of England have kept official interest rates on the floor, but the stock markets there also have continued to fall. What is more, even on the days that the central bankers announce that they will hold or cut official interest rates, the actual market rates of interest – the yields on bonds etc. – have been rising, which shows that the central bankers cannot dictate market prices.

The truth is that although China's economy is slowing down, it is still growing rapidly, and as Michael Roberts set out recently, those who are writing it off, are likely to be proved wrong as they have been several times in the past. Having said that, China does have several problems it needs to address. It needs to shift its economy more towards its own huge domestic market. To do that, it will need to do what every other developed capitalist economy has done, and create a welfare state. Industrialised capitalist economies require a welfare state, so that the workers do not engage in individual large scale savings to cover unemployment, ill-health, old age and so on. In that way, they can devote a larger portion of their wages to consumption. But, also industrialised economies need a welfare state, which acts as the provider of the quantity and quality of labour-power required by capital, at the least cost to it, and also acts as a large automatic stabiliser in the aggregate demand of the economy, avoiding the need for ad hoc interventions.

Global growth is not stellar, at the moment, for the reasons discussed above and in previous posts, but there is still growth. In the US, where the financial pundits continue to plead, on behalf of the speculators they represent, for the Federal Reserve not to raise interest rates, growth is still strong enough to suggest that the central bank is behind the curve and should have raised rates long ago, rather than holding off on raising them for even longer.

But, the reality is that, whatever the Federal Reserve, the Bank of England, the PBOC or any other central bank does, they have made themselves irrelevant. They have repeatedly blown up asset price bubbles when they collapsed over the last 30 years, and have spent up their firepower in doing so. With interest rates at zero, and their balance sheets blown up out of all rational proportion, they cannot now do anything to reflate property or stock markets, without risking hyper inflation. If central banks cannot now even suggest that they will raise official rates from zero to 0.25%, for fear that it will cause a stock market crash, then in reality, they may as well admit they can never raise official interest rates ever again, because with such extended bubbles, any rise in interest will always provoke such a crash, as Gary Kiminsky pointed out on Bloomberg yesterday.

So, as has happened in the past, and as the rise in bond yields over the last few days has shown, whatever central banks do, the market will ignore anyway. If the central bank does not raise rates, then the markets will do it for it, as the owners of money-capital begin to realise that the risk return has moved decidedly against them. That is really what is behind the current sell-off. The supply of money-capital is declining, whilst the demand for money-capital is rising, with the necessary effect that interest rates will rise. As Marx, Massie and Hume set out that cannot be changed by simply printing more money.

Yet, it is the latter that the central banks have essentially relied on as their only tool. But the tool is now blunted, it is a hammer trying to treat every problem as a nail.

Corbyn and Women Only Carriages

A lot of middle class opponents of Jeremy Corbyn seem to be getting very desperate to find some basis on which to attack him, and in the process only demonstrate the extent to which their middle class way of life separates them from ordinary working-people.  So, on the BBC Paper Review last night, Corbyn was attacked for proposing women only carriages at night on London Underground as a means of dealing in the short term with the rising problem of attacks on women on the tube.

The basis of the criticism was that by suggesting that women should have the benefit of their own carriages, it means making women the problem, not the attackers!  Really?  It seems to me to show a recognition that it is the attackers who are the problem, and that it is women who are the victims of the problem, and to provide an immediate practical solution to that problem.  The argument that was put that its necessary to deal with the attackers shows just how removed these middle class pundits, who probably never have to suffer that risk of attack are.

Of course, it would be great to be able to deal with the attackers, and indeed to deal with that aspect of human behaviour that leads to the attacks, but that hardly deals with the problem of women facing the attacks now does it.  Its the equivalent of the old response to every problem with the demand for "Socialism Now".  Its also the equivalent of the idea put forward by conservatives that the answer to teenage pregnancies is not to provide girls and boys with contraceptives, but to tell them not to have sex!

The idea that women should have their own compartments as a safe zone on tubes as a means of dealing with the current situation seems eminently sensible.  It is in fact no different from similar suggestions such as having "women only" shortlists for selection meetings and so on, to deal with the problems of sex discrimination against women.

But, then it seems the Blairites are so desperate now that they will pick anything to try to beat Corbyn with.

Capital III, Chapter 13 - Part 13

The various theories put forward to explain a falling rate of profit, by previous economists, therefore, were wrong and superficial, because they merely described the effects of competition, rather than the underlying relations and processes. It may, for example, be true that commercial enterprises obtain a greater mass of profit, by adopting lower profit margins, to promote higher levels of sales, or that the rate of profit, in one industry, is higher than another, because of various peculiarities, and so on. But, this does not explain why an average rate of profit should be at some specific level, around which these other rates of profit revolve, and why it is that, even if all of these other factors are removed, a rising mass of capital should also have a tendency to reduce the average rate of profit.

“The law that a fall in the rate of profit due to the development of productiveness is accompanied by an increase in the mass of profit, also expresses itself in the fact that a fall in the price of commodities produced by a capital is accompanied by a relative increase of the masses of profit contained in them and realised by their sale.” (p 225-6)

The higher levels of social productivity means that each individual commodity absorbs absolutely less value of constant and variable capital.  (This same process causes the proportion of value attributable to fixed capital and labour to fall, but for the proportion of value attributable to materials, i.e. circulating constant capital to rise.)

That can be seen in the following table, which shows the effect of rising productivity brought about by continually improved technology of fixed capital.  It shows that the price of individual commodities falls by 66.6%, the proportion of the price accounted for by fixed capital and labour falls, whilst the proportion accounted for by materials rises sharply.  The proportion accounted for by surplus value falls, despite the fact that the rate of surplus value increases substantially.

Fixed Capital
Variable Capital
Surplus Value
Total Output
Price Per Unit

“This causes the price of the individual commodity to fall. But the mass of profits contained in the individual commodities may nevertheless increase if the rate of the absolute or relative surplus-value grows. The commodity contains less newly added labour, but its unpaid portion grows in relation to its paid portion. However, this is the case only within certain limits.” (p 226)

In other words, as production and productivity develops on a massive scale, the amount of unpaid labour to paid labour, i.e. the rate of surplus value, will expand, but if the increase in output is large enough, even this higher proportion of surplus value will fall as a proportion of the value of each individual commodity unit.

“The mass of profit on each individual commodity will shrink considerably with the development of the productiveness of labour, in spite of a growth in the rate of surplus-value. And this reduction, just as the fall in the rate of profit, is only delayed by the cheapening of the elements of constant capital and by the other circumstances set forth in the first part of this book, which increase the rate of profit at a given, or even falling, rate of surplus-value.” (p 226)

Again, this seems to contradict the notion of a growing mass of surplus value, but, just as a falling rate of profit was the reverse of a growing mass of profit, so this fall in the proportion of profit in the individual commodity unit is just the other side of the massive increase in the quantity of units produced.

At 3000 units, the total surplus value above was £1,000, when it comprised 33.33% of the individual commodity value.  Even though, it falls to 15.86% of the much lower individual commodity value, when the output rises to 129994 units, this amounts to a much greater mass of surplus value, i.e. 129994 x 5.2338 = £6803.62

The price of commodities continues to fall as a result of this continual rise in productivity, even if the price of some elements of the constant capital rises. For example, even if the price of cotton rises, the price of yarn will still tend to fall, because the value of spinning machines will continue to fall, and not only will the value of labour-power continue to fall, but that labour-power will continue to become more productive so that a given quantity of labour-power will process an increasing quantity of cotton.

It should be taken into consideration, here, that Marx has moved from an analysis of the tendency for the rate of profit to fall at the level of social capital, to one at the level of the individual industry/commodity. This point, which is usually missed, is important because, as previously indicated, assumptions which may be valid at the level of the industry/commodity are not valid at the level of social capital. For example, we can see that, at the level of the individual commodity/industry, there is every reason to assume a rising technical composition of capital, which leads to a rising organic composition. We would then only have to concern ourselves with the effects of a cheapening of the constant capital, relative to the variable capital, and of changes in the rate of surplus value, in considering the effect on the rate of profit in that industry.  We would also have to consider the concomitant changes in the rate of turnover of the capital, if we were to consider the changes in the annual rate of profit, rather than the rate of profit.

But, there is no reason to make this assumption at the level of the social capital. New industries/commodities are developed all the time, and far more so in periods of rapid technological change. There is no reason to assume that these industries/commodities will have the same technical or organic composition of capital as existing industries/commodities. On the contrary, there is every reason to believe they will have a much lower technical and organic composition, which will in turn act to reduce the technical and organic composition of the total social capital. Marx makes out this case later, to show that this fact alone can neutralise the tendency for the rate of profit to fall.

Tuesday, 25 August 2015

Cognitive Dissonance

There was a perfect example of just how unable the financial analysts and journalists are to deal with the current situation, last night. The BBC's Robert Peston, discussed the crash in global markets, and invited a number of analysts to contribute. The basic story we are told, is that its all China's fault. Earlier in the evening, the FT's Gillian Tett, had given the same message, that China's Stalinists had done a great job in rapidly growing a backward economy, by central planning, but now, the economy was just too big for it to be planned in that way, and the wheels were coming off, as they found that you cannot dictate the market prices for commodities, which will be set by the interaction of supply and demand. At the end of Peston's piece, we were all consoled, however, by another analyst, who concluded, but the good news is that if you have a mortgage, this means that the Bank of England probably will not be raising interest rates, so your mortgage will not be going up!!!!

This was said with a straight face, with no sense of irony, in consideration of everything that had just been said. So, the line they are spinning is; the Chinese economy is crashing because central planners cannot determine prices, but don't worry, because OUR central planners, at the Bank of England, CAN set prices, they can determine the price of capital, for eternity, irrespective of the laws of economics!

In fact, as on many previous occasions, when the pundits, and the central bank planners at the Bank of England themselves have confidently told us that “interest rates will not be going up”, UK interest rates yesterday DID go up, and they went up again this morning, along with interest rates in most EU countries. In other words, the actual interest rates, the yields on various government bonds, continue to move up and down, dependent upon whether the lenders of money-capital provide relatively more or less of it, in relation to demand, went up, despite all of the selling of shares, which would normally send money into bonds, as a safer haven, and especially into UK government bonds, which are a safer haven than all of the “emerging market” bonds and shares, which have seen trillions of dollars flooding out of them in recent weeks.

The fact is that, whatever the Bank of England, or the Federal Reserve might want to ordain as the official price of capital, they will find, as have the Chinese central planners, that the actual price of capital, the rate of interest that borrowers have to pay, to borrow money-capital, will be set, not by the central bank, but by the willingness of owners of that money-capital to lend it, compared to the willingness, or need of borrowers to borrow it. The former will be determined by how much of this money-capital is created by the mass of realised profits increasing, or by the proportion of revenues in the form of profits, interest and rents that are thrown into the money market, to be loaned (and that means to provide new loans, to buy new shares/bonds, not to simply bid up the prices of existing property, shares and bonds). The demand for this money-capital will depend upon the extent to which firms need to borrow money-capital to buy means of production and labour-power to expand their capital, which depends upon whether they see the potential for rising demand for their output, or in a crisis, the need for money just to stay afloat.

For the reasons Marx, Hume and Massie describe, that rate of interest cannot be reduced simply by the central bank printing more currency. Only if the central bank could itself make every loan, buy every share, bond, mortgage and so on, could it do that, and the cost would then be that the value of the currency itself would be utterly destroyed. In other words, there would be hyperinflation.

The problem is also illustrated by the fact that none of these pundits seem to grasp the difference between the real economy, real capital and the fictitious capital that swirls around the financial markets. The crisis that will at some point break out in the financial markets, on a far bigger scale than that of 2008, will not be the result of weakness in the real economy. Quite the contrary. It is relative strength in the real economy that provided the spark for the 2008 crisis, as rising inflation in 2007, caused market interest rates, and then official interest rates to rise. It will again, be rising market rates of interest, as the demand for money-capital rises relative to the supply of money-capital, which will spark the next more monumental financial crisis. The instinctive response of those pundits and speculators to cheer every bit of bad economic news, is founded upon this fact.

Between 1980-2014, the Dow Jones Index rose by 5 times the rise in US GDP and the biggest rise in the Dow was during the period of slowest growth. So there is no correlation between a rising economy, and a rising stock market. Quite the opposite, in fact.

During periods such as the early 1980's, capital begins to introduce a range of new labour saving technologies, which significantly raise productivity where they are introduced. The effect of these new technologies is typically contradictory. Considered within the sphere in which they are introduced, because they displace large amounts of labour, they reduce the produced surplus value, which acts to reduce the general rate of profit, in the way Marx describes in his Law of the Tendency for the Rate of Profit to Fall. But, because of the operation of prices of production, the industries that introduce these new technologies actually experience higher than average rates of profit, until such time as additional capital moves into these spheres, to increase supply and reduce market prices.

Moreover, the consequence of this labour-saving technology, as Marx sets out, is to increase the relative surplus population. Wages fall, as unemployment rises, which leads to a rise in the rate of surplusvalue and profit. These new technologies, bring about a significant “moral depreciation” of existing fixed capital, and rising productivity reduces the costs of circulating constant capital, particularly as raw material costs tend to be low during such periods. The effect is that although economic growth may be sluggish or stagnant, the annual rate of profit begins to rise sharply. Its this which causes share prices to rise significantly.

On the one hand, rising rates of profit causes the earnings bit of the price/earnings ratio to rise, so share prices appear cheaper. On the other, the increase in the realised money-capital, from higher profits, reduces interest rates, which causes p/e multiples to widen. Following the financial crash of 1987, this was exacerbated by the actions of central banks, which printed money and promoted the buying of these bonds and shares, and thereby created the series of huge asset price bubbles that are now bursting.

In fact, now, for all the reasons I have set out before, productivity growth is slowing, wages will start to rise, profits will start to get squeezed, (even as the mass of profits rise), because the cost of producing those profits will rise, the supply of money-capital will fall relative to the demand, so interest rates will rise, and that will be reflected in a bursting of the property, share and bond bubbles. It is not a faltering global economy that is behind the current market sell-offs. Those markets are selling off, because huge financial bubbles were created within them, and they are no longer supportable. It is merely appearance being brought into alignment with reality.

The same financial pundits, for example, have explained the sharp drops in the price of oil and other primary products by claiming that again it is due to declining demand for these materials in China. That is reminiscent of the claims of Ricardo, Mill and Say that there could be no overproduction, only under consumption. Marx showed that claim was nonsense. It was not the failure of the millions of Chinese to consume the masses of textiles and opium Britain was sending them, that was the problem, but the fact that Britain had overproduced the commodities it wanted to sell to them, because it had expanded production via the use of ever more powerful machinery that was the cause of the inability to sell them.

The same applies today. The demand for oil, for example, is NOT declining, but rising. According to the IEA global oil consumption increased by around 2% last year, and is forecast to rise by 2% again this year. It is not falling consumption of oil that is causing the price to collapse, but the fact that high oil prices after the start of the new long wave boom, caused the usual increase in exploration and search for new technologies to extract more oil, and use existing supplies more effectively. The sharp fall in oil prices is caused by overproduction, for example, the fact that fracking has made the US self sufficient in oil and gas, not reduced demand from slower Chinese growth.

The same can be seen in respect of consumption of copper, and with iron ore. It is not falling demand that explains sharply lower prices, but sharply increased supply, which is always what happens at this juncture of the long wave cycle. A look at the oil market shows that even at these low prices, additional supply continues to be added. Even many of the high cost producers continue to pump oil, rather than close down, which means that, at some point, many of these producers will go bust, as the large amount of junk bonds, which financed them will go bust too, spreading a further financial panic into financial markets. Not only will those bonds go bust, but it will trigger a cascade of claims on CDS's etc., as happened with the failure of mortgage backed securities in the sub-prime crisis.

In the meantime, Saudi Arabia, which needs oil prices at around $90 a barrel to balance its budget, is prepared to keep pumping out oil, down to its cost of production of around $15 a barrel, in order to retain and extend its market share, and force out of business the US shale producers, and at those kinds of prices, many North Sea producers would go bust too. This is a classic example, of the kind of partial crisis of overproduction that Marx describes in Capital III, Chapter 15. In the meantime, Saudi has gone from a large supplier of loanable money-capital in global money markets to a borrower, a similar effect has happened with Norway and its sovereign wealth fund, and the same applies to all those economies that have benefited from huge amounts of revenue in the form of rents, which provided part of the huge mass of money-capital into money markets over the last 30 years.

Yesterday, I watched a number of pundits who said, that they were buying large scale into these falling markets. Some of them were the same ones who have said the same thing over the last few weeks, as markets continued to drop, contrary to their predictions. In all these cases, the pundits and fund managers based their faith that they were doing the right thing on the fact that they claimed that they have “been doing this job for thirty years”. But, that is the problem. They have only been doing their job for the last thirty years! They have only been doing their job during a thirty year period when overall markets have gone up. When they didn't go up, because of economic fundamentals, they went up, because of speculation, fuelled by low interest rates, and a capitalism structured around the needs of fictitious capital rather than productive-capital. When that speculation failed, and market crashes occurred, conservative governments and the representatives of that fictitious capital, in central banks, intervened to print money and buy bonds, and shares to underpin those prices, which is why with such a one way bet, the owners of money-capital were happy to gamble with it, bidding up the prices of property, shares and bonds, to totally ridiculous and unsupportable levels, that has required ever more state intervention, ever more elaborate financial engineering and manipulation of the figures to sustain.

It is why we repeatedly hear the pleas of the financial journalists, who ask, “what can the authorities do to bring the selling to an end,” as though those authorities can or should do anything to bring it to an end.

Its the same thing with those journalists as with the Blairite politicians who cannot understand the world they are now living in. They too have only been in their jobs for thirty years, and many for more like thirty months! They have only known a world where property prices, share prices and so on go up, and where the world revolves around this paper wealth, and the conservative ideas that flow from it. Theworld is changing, Corbyn, Syriza, Podemos, Bernie Sanders are merely a reflection of it. The material conditions that support conservatism fictitious capital are weakening, and the conditions that support social-democracy and big socialised, industrial capital are strengthening.

Capital III, Chapter 13 - Part 12

For the mass of profit to remain the same, the capital must expand at the inverse of the fall in the rate of profit. In other words, if the rate of profit falls by 1/2, the capital must expand by 2/1. But, it is usually the case that in periods of rapid technological change, the rise in productivity causes falls in the value of means of production and consumption, which raises both the rate and mass of surplus value, and rate of profit, but also leads to a rapid accumulation of capital. During such periods, both the mass and rate of profit rise. That is a process seen after the start of the new Long Wave Boom after 1999.

By contrast, in the Summer and early part of the Autumn phase of the Long Wave, like the 1960's – late 1970's, the opposite applies. Basically, the existing technology is simply rolled out on a larger scale. Productivity fails to rise significantly, profits are squeezed, whilst the mass of capital fails to expand at a fast enough rate to cause the mass of profits to rise enough to bring about a rising rate of profit. It is this process, which leads capital to seek to introduce new labour-saving technology, which thereby raises the organic composition of capital, and creates the tendency for the rate of profit to fall (latter part of the Autumn phase, 1980-87). But, it is this very process, which thereby then creates the conditions for a fall in the value of constant capital, the value of labour-power and a rising rate of profit, during the stagnation or Winter phase of the cycle  (1987-99), which in turn creates the basis of the new boom phase.

“Thus, the same development of the social productiveness of labour expresses itself with the progress of capitalist production on the one hand in a tendency of the rate of profit to fall progressively and, on the other, in a progressive growth of the absolute mass of the appropriated surplus-value, or profit; so that on the whole a relative decrease of variable capital and profit is accompanied by an absolute increase of both. This two-fold effect, as we have seen, can express itself only in a growth of the total capital at a pace more rapid than that at which the rate of profit falls.” (p 223)

The previous economists failed to understand this process, because they did not understand the difference between constant and variable capital, and so did not grasp the source of surplus value, and the difference with profit. So, when they consoled themselves with the observation that whilst the rate of profit was falling, the mass of profit was rising, this was based on weak theoretical foundations, which is why they were led into a Malthusian, catastrophist belief that a falling rate of profit must, at some point, lead to a falling mass of profit, which would spell the end of Capitalism. Some supposedly Marxist economists promote this Malthusian/Ricardian argument even today, to predict some kind of collapse of capitalism.

Marx believed such arguments were nonsense, and sets out why. For example, in Theories of Surplus Value II, he writes,

“A distinction must he made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist.”

(Theories of Surplus Value, Chapter 17, Note 1)

Marx makes clear why the Ricardian position is wrong. If the mass of profit is a function of both the rate of profit and mass of capital, then its possible that the mass of profit could be less if the mass of capital is not sufficient to compensate for a lower rate of profit. For example, £1 million of capital with a 5% rate of profit produces £50,000 of profit, but £2 million of capital with a 2% rate of profit produces only £40,000 of profit.

However, Marx points out that this assumes that the fall in the rate of profit and the increase in the mass of capital are unrelated rather than reciprocal manifestations of the same process.

“But if the same causes which make the rate of profit fall, entail the accumulation, i.e., the formation, of additional capital, and if each additional capital employs additional labour and produces additional surplus-value; if, on the other hand, the mere fall in the rate of profit implies that the constant capital, and with it the total old capital, have increased, then this process ceases to be mysterious. We shall see later [K. Marx, Theorien über den Mehrwert.K. Marx/F. Engels, Werke, Band 26, Teil 2,. S. 435-66, 541- 43. — Ed] to what deliberate falsifications some people resort in their calculations to spirit away the possibility of an increase in the mass of profit simultaneous with a decrease in the rate of profit.

We have shown how the same causes that bring about a tendency for the general rate of profit to fall necessitate an accelerated accumulation of capital and, consequently, an increase in the absolute magnitude, or total mass, of the surplus-labour (surplus-value, profit) appropriated by it. Just as everything appears reversed in competition, and thus in the consciousness of the agents of competition, so also this law, this inner and necessary connection between two seeming contradictions. It is evident that within the proportions indicated above a capitalist disposing of a large capital will receive a larger mass of profit than a small capitalist making seemingly high profits.” (p 224-5)

This law, elaborated by Marx, is important in relation to mature capitalism, for the reasons described earlier. If any such tendency for the rate of profit to fall is nothing more than the other side of the rise in the mass of profit and capital, and if large companies can thereby compensate for any fall in the rate of profit by the concomitant rise in the mass of profit, then in economies dominated by such large companies, the role of the falling rate of profit is negated.

Moreover, this fact, that this lower rate of profit is the other side of the larger mass of profit has practical implications in respect of competition.

“Even a cursory examination of competition shows, furthermore, that under certain circumstances, when the greater capitalist wishes to make room for himself on the market, and to crowd out the smaller ones, as happens in times of crises, he makes practical use of this, i.e., he deliberately lowers his rate of profit in order to drive the smaller ones to the wall.” (p 225)

Monday, 24 August 2015

China's Black Monday

Even the official Chinese news agencies are calling the 8.5% drop in the Shanghai Composite Index, and similar drops on other Chinese markets “Black Monday”. As I suggested last week, even the intervention of the Chinese Central Bank, and the proposal that Chinese Pension Funds should try to prop up the stock market, by speculating a third of their funds into the market has not stopped it, and it will not stop it, because these markets, like those in the west, have been in an astronomical bubble for a long time, and that bubble is now bursting. These last acts only emphasise that the states and central banks have used up all of their ammunition to keep these fictitious assets inflated, and their actions now smack of the desperation of a drowning man.

The proposal to “allow” Chinese pension funds, which really amounts to an instruction to do so, to use a third of their funds, about $150 billion, into the stock market, for the first time, is a bit like a football team that has tried every trick in its book, and in the last minute of extra time sends the goal-keeper up to the opposition goal, while they take a corner kick. More ominously for Chinese workers, whose savings are invested in these pension funds, it is rather like the actions of the state in Cyprus, which bailed out the capitalist banks and financial institutions, in the country when they failed a couple of years ago, by raiding government workers pension funds.

In 2008, when the banks and financial institutions went bust, after 3 decades of rampant, state sponsored speculation, to blow up the prices of fictitious capital in shares, bonds and property markets, the state stepped in to bail out the private owners of that fictitious capital. The state bought up shares in the banks, rather than allowing them to go bust. Having done so, they have then imposed – in many countries outside the US, China and a few other places – austerity on to the populations of those countries to recoup the money they handed out to the owners of that fictitious capital.

The proposal to squander Chinese workers pensions on an attempt to delay the collapse of Chinese stock markets is just another last gasp in that process. And it will be a squandering of that money, because the prices of that fictitious capital will continue to collapse. It is a squandering of that money in the case of China, because using it to buy shares will create not one penny of additional wealth in China, and there are lots of different ways that it could be used productively, that would be beneficial to the Chinese economy, and to Chinese people.

But, the same has been seen in the UK, US and many parts of Europe over the last three decades, and more intensely in the last ten years or so. We have seen people encouraged to take out private pensions, which were missold to them, and whose value collapsed. The policy of QE, has not only pushed up house prices to ridiculous levels, which has put them out of the reach of a large proportion of workers, but, has in the process massively increased rents, and the costs of Housing Benefit. But, it is also the policy of QE, which has destroyed workers pensions. On the one hand, it pushed up the prices of shares and bonds, to ridiculous levels, so that workers pension contributions bought fewer of them to go into their pension pot, on the other, the same process continually reduced the yields on those bonds and shares, so that the income from the pension funds, became less and less able to meet the requirements for pension payments. That is what has caused the massive black holes in pension funds, not the fact that workers are living a few years longer.

But, in response to that, we have also then seen people encouraged to waste huge amounts of their savings buying up property at exorbitant prices, on the promise that this would instead provide them with a pension income, where their actual pensions and savings could not. In addition, they were encouraged to take their own savings and equity in their own houses, to waste money providing deposits for their children, to buy those same hugely over priced houses, and so keep the bubble inflated a while longer. Everyone who has speculated in property over the last twenty years, and particularly over the last ten years, will see their money disappear just as surely as the investors are currently seeing on the Shanghai, and other global stock markets.

What is also notable in this respect, is that global markets have been selling off now for more than a week. Last week, the Shanghai market fell again significantly, followed by the steep falls in the US, UK and Europe. Asian and European markets had already fallen significantly by their close on Friday, and before the 3% plus drops in the US, on Friday. Yet, the mainstream news channels said nothing about it, either on Friday or over the weekend. When I got up this morning, and after Shanghai had closed down 8.5%, with European markets opening with falls of around 2.5%, the BBC News Channel was still saying nothing about it, preferring instead to see the break up of One Direction as a more significant global news story!

As markets continued to crash, they eventually did mention it briefly on the Business News section, but mostly in terms of it being a crash of Chinese markets. Its almost as though the mainstream news has blacked it out, in order to allow the main owners of this fictitious capital to sell off their rapidly depreciating assets, to the less savvy punters, before the markets really crash, just as those main owners of fictitious capital were bailed out by the rest of us in 2008, just as they were bailed out by workers pension funds in Cyprus, as they are being bailed out in China from workers pension funds and so on.

The same thing applies to all of the various scams to get people, over the years, to waste their money buying up massively over priced property, before it crashes. As I wrote recently its a lot like a second massexpropriation of the peasantry, a means of dispossessing large numbers of workers who built up savings and property after WWII, of what they had gained by their hard work, by offering them unrealistic prospects of wealth from gambling. Its perhaps no coincidence that during the same period, we have had a massive expansion, promoted by the state of gambling in general.

The financial pundits are in territory they cannot understand, and keep repeating the old mantras, asking the question about what the authorities can do to end the sell-off, as though, in the end there is anything a central planner can do to stop such a sell-off, as though they can dictate the value and price of commodities, be they beans or capital, and as though even if they could stop such a sell-off, they should. In reality, as Marx pointed out long ago, a sell-off of these fictitious capital markets is actually a good thing. It would certainly be a good thing for workers, for the reasons I've set out before – it would mean the cost of providing pensions becomes slashed, and it means that the cost of housing returns to more rational levels.

In reality, the central banks have made themselves irrelevant. They have had six years since 2008 to have normalised monetary policy, and have failed to do so. They have instead kept pumping out liquidity to inflate asset markets at the expense of the real economy. Now, official interest rates are at near zero, and they have already pumped the markets so full of liquidity that they are fit to burst. In fact, as I write this, and in line with what I said on Saturday, its not just equity markets selling off, but bond markets too in a number of European countries, including the UK, even as the pundits continue to beg for the Federal Reserve not to raise official rates in September.

At the same time, the conditions which make a rise in interest rates inevitable continue to develop. The continued drop in oil prices is being attributed to a slow down in demand, caused by a slowdown in the Chinese economy. But the reality is that the demand for oil continues to rise, not fall. In fact, lower oil prices has caused the demand for oil, globally to rise more strongly than it was. The falling oil prices, as with the prices of other raw materials is not due to lower demand, but due to a continued strong increase in supply, as new methods of oil extraction, such as fracking, has massively increased the amount of oil coming on to the market, and has significantly reduced the cost of production of that oil. In other words, as I've been forecasting for some time, it mounts to the normal overproduction of primary products that occurs at this stage of the long wave cycle.

But,as I set out a while ago, that means that the owners of huge amounts of rent arising from this production, now see that rent disappear, and they become borrowers, rather than lenders into the capital markets, which pushes up interest rates.

We are in for a period where this fictitious capital gets massively writtendown, and that process is likely to continue for a prolonged period, just as the process of blowing up these bubbles occurred over 30-40 years, so sharp sell-offs, followed by small recoveries, will be part of a long term downward trend.