Monday, 7 September 2015

Capital III, Chapter 14 - Part 7

6) The Increase In Stock Capital

The development of socialised capital, in the form of the joint stock company changes everything that has been said in relation to the falling rate of profit, however, Marx says. The money-capitalist, who lends money-capital to the individual, private productive-capitalist, receives interest on the money-capital they lend, whilst the productive-capitalist pockets the industrial profit. But, with socialised capital, be it a joint stock company, co-operative, limited liability company, corporation or trust, the shareholders of the company are all themselves money-capitalists, who provide money-capital, via the purchase of shares. But, the day to day decisions on investment, in productive-capital, become the job of professional managers.

By nature, these forms of socialised capital are much larger than the old firms that existed under the monopoly of private capital. These new forms of socialised capital have come into existence via the process of “the expropriation of the expropriators”, that Marx described in Capital I, and which he returns to again later in Capital III, precisely because that monopoly of private capital had become a fetter on further development of capital, and had been “burst asunder”. Where the old, private capitalists drew their industrial profit directly from the firm, and allocated it to additional investment or to their own consumption, the shareholder obtains instead merely a dividend as a form of interest on their fictitious capital. Later in Capital III, in examining the Trinity Formula, Marx says that this process does away with the category of profit altogether. The shareholder receives not profit, but interest on their shares, whereas the professional manager, who replaces the social function of the capitalist in the production process is paid wages, like any other skilled worker.  In fact, he says, as capital increases public education - and today this would apply even more with the development of the welfare state - it becomes possible to fill these posts, as "functioning capitalists", from the ranks of the working class, along with all of the other commercial, technical and administrative posts, so that the wages paid for them can even drop below those of a skilled worker.

“But in the sense that these capitals, although invested in large productive enterprises, yield only large or small amounts of interest, so-called dividends, after all costs have been deducted. In railways, for instance. These do not therefore go into levelling the general rate of profit, because they yield a lower than average rate of profit. If they did enter into it, the general rate of profit would fall much lower. Theoretically, they may be included in the calculation, and the result would then be a lower rate of profit than the seemingly existing rate, which is decisive for the capitalists; it would be lower, because the constant capital particularly in these enterprises is largest in its relation to the variable capital.” (p 240)

However, Marx could have elaborated further on this part. One of the reasons that the monopoly of private capital came to represent a fetter on production was that the individual private capitalist tended to invest their money-capital in their own business, precisely because it was something they knew about. Where they invested in some other business, it was usually some related activity. For example, Marx says that the makers of mirrors expanded into brass production, where brass was used for mirror frames. If such private capitalists chose not to invest additional sums into their existing business, they may increase their consumption, or simply save the profits as money in the bank. It would only then become money-capital, if some other productive-capitalist wanted to borrow it for the purchase of productive-capital. Otherwise, the money lies fallow and unproductive.

But, with a joint stock company, the shareholders are essentially footloose. They can invest their money in one or many different companies as share capital. They may know something or nothing about the industries in which they invest, outside the necessary facts of the firms finances and state of the market for its products. They have no concern, necessarily, with whether it is maximising its profits or accumulating capital so as to be more efficient than its competitors – though they will assume the professional managers of the business will do this to maximise their own revenue and job security - but only with whether the yield they obtain from their shares maximises their own return, compared with buying the shares of some other company, or buying bonds or some other financial asset.

This represents a significant change. It remains the case that each individual capital, i.e. each individual firm, must seek to maximise its profits so as to generate funds to accumulate capital, and thereby become more efficient than its competitors, but this drive no longer determines the actions of each individual money-capitalist. If I am a capitalist, buying shares, bonds, or other financial assets, I am no longer constrained to continually invest more and more into these things, in order to be more efficient and competitive. I will want to obtain the best total return on any money I do invest, taking into consideration the relative risks of alternative investments, but I have no objective necessity to keep investing and keep accumulating.

If I invest £1 million in Microsoft shares, because I feel it is a good investment, the total return I receive, in terms of dividends and any capital gain on the shares, is no less in percentage terms than had I bought £100 million of shares. My objective driving force is no longer necessarily the need to accumulate, but only to maximise my total return, having decided how much to allocate for my consumption.

The private productive-capitalist has to gear their consumption spending to their need to accumulate, the coupon-clipping, shareholder capitalist does not. The latter can blow all their dividends and capital gains at the Casino if they wish, it will not change one bit their ability to maximise their returns, in the next year, which depends solely on investing their money in the right shares, bonds or other assets.  If they are already so invested, they can simply leave them there and continue to receive their dividends, and other gains, so as to fritter them away once more, without in any way affecting their fictitious capital.

But, this change also brings about another fundamental difference in relation to the rate of profit, and the formation of the average. In relation to actual productive-capital, all of the laws that Marx outlines, continue to operate. However, for all the reasons Marx sets out, the process of levelling to an average figure is long and drawn out, and can never be fulfilled, because the average is itself constantly changing.

With the accumulation of capital on a mammoth scale, of which the development of socialised capital is itself a manifestation, this process is even more difficult to achieve, because barriers to entry and exit, from any particular sphere, are posed, just by the scale of capital investment required to meet the minimum needed for efficient operation. The consequence is that large disparities, in profits, continue to exist between spheres for prolonged periods, as productive-capital remains locked up in low profit areas rather than flowing into high profit areas. This means that prices of production and market prices fail to be adjusted rapidly also.

But, the development of large liquid capital markets gets around this problem. Instead of physical productive-capital being re-allocated, fictitious capital, share capital gets revalued and reallocated. If the rate of profit in industry A falls, and in B rises, productive-capital may not move quickly from A to B, but the share price of A will fall, and that of B rise, other things being equal. In terms of the money-lending capitalists now buying and selling shares, rather than productive-capital, the yield on shares of both A and B will adjust towards an average figure, because a given amount of dividend will be expressed as a portion of a higher or lower share price.

As Marx sets out, in his discussion of the capitalists' grounds for compensating, this adds to the capitalists delusion over the source of profit. All the more does it seem that the returns (increasingly capital gains are merged with dividends as “profit” in the eyes of the speculator, a process recently discussed by the Bank of England's Andy Haldane) are solely a function of the skill of the individual investor, and their ability to pick winners, to buy low and sell high, to read the market and so on, and that higher “profits” are a function of higher risks.

The purest form of capital, the ability to generate something out of nothing, simply from exchange, then appears in the form of something which is not capital at all, but is only fictitious capital.

During periods when the quantity of money or just money tokens, thrown into circulation, increases, the amount available for such speculation increases, and more and more people are fooled into believing that they are financial geniuses, simply because the price of their shares or their house has risen, due to this excess of liquidity. Increasingly, these changes affect the psychology of investors. No longer is a high level of dividend sufficient. What is required is instant gratification, massive quick capital gains that can be realised and invested in the next big thing, or rolled over in the expectation that the next big thing is the current big thing, and that the price will continue to rise to the stars.

By such means are bubbles inflated that eventually burst and return the valuations of shares, bonds, property and other assets to more realistic levels.

But, this change also demonstrates two further points. Firstly, especially during a bubble, the price of the shares becomes increasingly detached from any concept of the rate of profit. Some of the companies, whose share price rises the most, do not even make profits! Their share price rises solely through momentum, i.e. buying has caused the price to rise sharply, which causes other speculators to jump on the bandwagon, which causes the price to rise further and so on.

Secondly, with companies run by professional managers, the rate of profit may no longer be their prime concern, in how they allocate capital. In fact, a low rate of profit may be a cause for them increasing investment, in order to reverse that situation, rather than reducing investment. Marx makes this point later quoting Richard Jones to that effect. Similarly, because such huge companies now operate on the basis of long-term plans for investment on a huge-scale, drawn up on the basis of projections of consumer demand, demographic change and so on, they are unlikely to simply throw additional billions into investment simply on the back of potentially temporary surges in demand and profits. Instead, any such profits may be stored up as strategic cash hoards, to be used when some propitious opportunity arises, e.g. to buy another company cheaply, or else may be used to buy back stock, thereby raising the share price.

Such decisions, as opposed to the day to day management functions, of the professional managers, the "functioning capitalists", are taken by those higher level boards of directors whose role is to represent the interests of the fictitious-capital, rather than the productive-capital.  These decisions on share buybacks and so on, are designed to inflate the prices of the fictitious capital, which directly benefits those directors via their stock options, but as Haldane points out can simultaneously amount to "capital eating itself", because it occurs at the expense of productive investment, without which there is no basis for increasing the mass of profit, and so no material basis for higher, dividends or share prices .

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