Tuesday, 13 October 2015

Capital III, Chapter 15 - Part 34

But, as Marx says, as capital also takes the form of share capital, commercial bonds etc., which act as a claim on any future profits, the prices of this fictitious capital also fall, as the prospect of a share in losses rather than profits looms. So, the prices of shares and bonds fall.

Marx points out that the destruction of this fictitious capital, which arises periodically with stock market crashes, should not be confused with real economic crises. The bursting of stock market bubbles need have no serious long-term effects on the economy. On the contrary, the bursting of such bubbles is usually a good thing, as is preventing their inflation in the beginning. The blowing up of bubbles only signifies a transfer of wealth from the hands of one group of robbers to another – usually from the productive-capitalists and merchant-capitalists to the money-capitalists, and landlords – whereas the bursting of bubbles sends the flow in the other direction.

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496)

But, capitalism develops as a system based on money as means of payment rather than just means of circulation. In other words, it relies on credit. But, such a system depends upon prices remaining relatively stable. If capitalist X buys commodity A today, with payment due in 30 days, they need to know that the price of A will be not significantly different 30 days from now. Indeed, the supplier of A needs to know that too.

If a company has run up a series of payment obligations such as these, on the basis of existing prices, then if market prices fall substantially, in the intervening period, its obligations remain. The consequence is that what Marx calls, in Theories of Surplus Value, a crisis of the second form arises. That is a money crisis or payments crisis that originates in the relations of production, i.e. in the overproduction of capital. As he says in Capital I, this is different to a purely financial crisis which originates in the financial markets.

The consequence of this payments crisis is that buyers default on payments at numerous points, which then means their suppliers do not get paid, causing them to default and so on. The immediate consequence is a credit crunch, as everyone wants cash payment, and everyone wants to hoard cash. So, short term interest rates rise sharply. But, as economic activity seizes up, the opposite arises.

“A part of the gold and silver lies unused, i.e., does not function as capital. Part of the commodities on the market can complete their process of circulation and reproduction only through an immense contraction of their prices, hence through a depreciation of the capital which they represent.” (p 254)

Money-capital then becomes abundant, as demand for it collapses, causing interest rates to fall sharply.

“This confusion and stagnation paralyses the function of money as a medium of payment, whose development is geared to the development of capital and is based on those presupposed price relations. The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction.” (p 254)

This period of stagnation, that arises in the Winter phase, of the Long Wave, prepares the new cycle via a number of mechanisms that Marx outlines. Firstly, in the period of prosperity, this causes workers to increase their numbers by more marriages, and because more children survive. This only raises the working-age population later, but the increased pressure exists on workers to maintain their families. This puts downward pressure on wages in opposition to the rise in wages of previous periods.

In this Winter phase, of the cycle, capital also seeks to reduce its costs, as part of the intensified competitive struggle for market share.

“...the fall in prices and the competitive struggle would have driven every capitalist to lower the individual value of his total product below its general value by means of new machines, new and improved working methods, new combinations, i.e., to increase the productivity of a given quantity of labour, to lower the proportion of variable to constant capital, and thereby to release some labourers; in short, to create an artificial over-population.” (p 255)

This is why it is during this Winter phase of the cycle, characterised by stagnation, that persistent unemployment arises, rather than during the previous periods, where over-exuberance leads to repeated crises of overproduction. In fact, this period of stagnation is characterised by the opposite of this over-exuberance. Rather than rampant investment in new additional capital (extensive accumulation), existing capital is bought up on the cheap. Its only where some new machine offers some significant competitive advantage that such investment is undertaken. Moreover, this intensive accumulation occurs as a result of worn out fixed capital being replaced with the latest technology, rather than just a simple like for like replacement.

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