Sunday, 8 November 2015

Employment, Wages, Inflation and Interest Rates

The US jobs number, on Friday, came in showing a significant  rise of 270,000, which was nearly 100,000 more than analysts had been predicting. It is nearly double the number required to ensure that the unemployment rate falls, so not surprisingly that fell too, down to 5%, or more or less where it was in the boom period, ahead of the 2008 financial meltdown. It means that official US interest rates are almost certain to rise next month, and immediately US market interest rates rose on the news.

For the reasons I have set out in previous posts, this good economic news is bad news for speculators. The immediate reason for that is that it means that interest rates will rise. Higher interest rates mean that the price of various forms of fictitious capital – shares, bonds, property – tend to fall, because the prices of these assets is based upon capitalised revenue. If rent stays the same, for example, then higher interest rates, mean a lower capitalised value of that rent, and so lower land prices. The same is true with the price of bonds and shares.

But, secondly it is bad news for speculators for another reason. The rise in employment, and fall in the unemployment rate, means that the demand for labour-power is rising relative to its supply, and this means that wages rise. In fact, the data also showed a 0.4% increase in hourly wages compared to the previous month. This is a 2.5% increase over the previous year, but if the figure is projected ahead, it would mean a rise of 6% over the next year. As the economy continues to grow, and this increased demand for labour-power rises, that could turn out to be an underestimate.

But, even if US wages were to rise by only 4-5%, over the next year, that would mean a transfer taking place from capital to labour, in other words, a reduction in the rate of surplus value. Rather than an increased rate of profit, facilitating a rise in the payment of dividends to offset the rise in interest rates, so as to keep share prices inflated, therefore, the opposite is likely. But, worse still for the owners of fictitious capital, is the other consequence of this rise in wages.

A rise in wages, means that workers will have more spending power to use to buy wage goods. This is already being increased by the fall in oil prices, and its pass through into the prices of other commodities. An indication of that can be seen in the strong demand for cars. As Marx demonstrated, in his polemic with John Weston, set out in “Value, Price and Profit”, this shift towards labour, which gives workers more spending power, also thereby results in a shift of capital accumulation, towards the production of those wage goods.

If demand for say TV's rises, as workers have more money to spend, due to higher wages and more of them in employment, the first effect is for the market price of TV's to rise, which means that profits in that sector rise, so capital moves in to obtain these higher profits, the supply of TV's rises, and the market price sinks back down again. In other words, this creates the kind of rise in aggregate demand that necessitates that capital increase its rate of accumulation.

It does not mean that capital need necessarily build more factories, or install more machines. As Marx describes, for long periods, capital accumulates on the basis of existing technologies, and as he says, at a certain level of output, it is extremely elastic, in its ability to expand production without the need for increased investment in fixed capital. Capital can accumulate, simply by employing more workers in existing factories, working with existing equipment, but simply processing more material, and producing a greater output.

“Accumulation of capital is, therefore, increase of the proletariat.”

(Capital Vol. I)

Marx's argument in "Value, Price and Profit", was that at the same time that the profits to be made from wage goods rises, the lower profits obtained by capitalists, as a result of rising wages, would result in them demanding fewer luxury goods, which would reduce the prices of those commodities, and the rate of profit on them, thereby encouraging a shift of capital from luxury goods production to the production of wage goods.  But, as Marx also sets out, elsewhere, part of the revenue of capitalists and landlords goes not on to the purchase of any such commodities, but simply into speculation in fictitious capital, i.e. the purchase of shares, bonds and property.  That means that a large amount of money tied up in such speculation is always available to be used for productive investment, so that the rate of accumulation rises, whilst speculation in fictitious capital declines, causing a fall in the prices of that fictitious capital.

But, with this increased accumulation, an increased advance of capital, with, at the same time, a reduced rate of surplus value, the mass of profits rises, but the rate of profit is squeezed. If the rate of interest rises, therefore, this can only be reflected in a fall in share prices, and bond prices. Its not surprising, therefore, that stock markets sold off on the prospect of higher rates, just as over the last few weeks they rose, in the belief that official interest rates were on hold for some time.

But, the fact is that central banks are way behind the curve. They are apparently knowingly behind the curve, calculating that allowing inflation to rise is a price they are prepared to pay, in order to keep asset price bubbles inflated for a while longer. However, past experience suggests that the consequence is likely to be that inflation rises faster and more uncontrollably than they expect, and that the consequence of that will be that the matter will be taken out of their hands, by market forces, with a much more dramatic collapse in the prices of fictitious capital.

It is not the rise in wages that is the cause of this inflation. Rather wages, as the market price of labour-power, rise as a consequence of a rise in commodity prices, which raise the value of labour-power. The situation can be understood in the framework of three related theories – long wave theory, Marx's theory of the tendency for the rate of profit to fall, and Regulation Theory.

In the Autumn phase (1974-87) of the last long wave cycle, relative labour shortages, led to rising wages, which squeezed profit margins, and made crises of overproduction more likely.

The solution to this situation, and to these crises of overproduction, as Marx sets out resides, ironically in the law of the tendency for the rate of profit to fall. That law operates as a result of a rise in social productivity, whereby more material (constant capital) is processed by the same quantity of labour. The way this is achieved is by the introduction of new technologies that raise productivity.

Increasingly, firms looked for means of reducing wage costs, which are squeezing their margins, via the introduction of new labour-saving technologies. By definition, these new labour-saving technologies were introduced as replacements for existing technologies, and not as additions to them. The consequence is that employment growth slows or goes into reverse, causing unemployment to begin to rise. This is a period, of intensive accumulation, as described by the Regulation School, as opposed to extensive accumulation, whereby simply more of the same technologies are rolled out, adding to the stock of fixed capital.

The initial consequence of this switch to intensive accumulation is that the rate of profit falls, because relatively less labour is employed, to the volume of output produced, and the value of constant capital, consumed in its production.

Higher levels of unemployment, reverse the pressure on wages, so the rate of surplus value begins to rise once more. This intensive accumulation creates the conditions for the rate of profit to rise for other reasons than this rise in the rate of surplus value. Once these new technologies begin to impact the market values of commodities (because they are used on a sufficient scale, and not just by small innovative companies) they cause a sizeable moral depreciation of all the existing installed fixed capital.

In addition, it causes a fall in the value of all circulating constant capital, because less labour-time is required for its production, due to higher productivity. The consequence is that although the technical composition of capital rises, the organic composition of capital falls, and so the rate of profit rises. This change in conditions can be seen during the long wave Winter, or stagnation phase that ran from around 1987 to 1999.

It was on this basis of a rising rate of profit, which translates into rising masses of profits that the increase in the global working-class was based. The global working-class has doubled since the end of the 1980's, and rose by a third in the first decade of this century alone. And, as Marx says above, the accumulation of capital is the increase of the proletariat. It is this proletariat that produces surplus value. The mass of surplus value, Marx explains in Capital I is determined by two things, firstly, the mass of labour exploited, and secondly the rate of exploitation. If the mass of labour remains the same, but the rate of exploitation rises, then the mass of surplus value rises, and vice versa. If the rate of exploitation remains the same, but the mass of labour rises, then the mass of surplus value rises, and vice versa.

A doubling of the global working-class, together with the rise in the rate of exploitation, brought about by sharply higher levels of productivity, caused the mass of profits to rise sharply. The same process, because it brought about a sharp moral devaluation of existing fixed capital, and a sharp fall in the value of circulating constant capital – essentially materials, and intermediate goods – brought about also a sharp rise in the rate of profit. That was intensified, in relation to the annual rate of profit, as a consequence of a significant increase in the turnover of capital, brought about by the same technological developments.

Taken in this context, of higher levels of productivity due to past technological developments, the rises in US jobs numbers is an indication of the underlying rise in capital accumulation, not necessarily in additional fixed capital, and certainly not fixed capital values, but in the mass of circulating capital processed. This is further complicated and hidden today, by the nature of the commodities involved, which may not even require the processing of materials at all, for example, in certain kinds of service industry.

As I've described previously, however, the peak of this previous innovation cycle came around 1985. That was when the mass of base technologies, currently being used, in a variety of new technologies, built upon them, were developed. All of the technologies today, such as the personal computer, the mobile phone, digital cameras, the Internet, gene and bio-technologies have been built upon the base technologies developed during that earlier period, in response to a need to create new labour-saving methods of production.

The period of introducing these new technologies, as replacements for existing technologies, has been gradually drawing to a close, so that more and more, the accumulation of capital takes the form of extensive accumulation. Rather than old machines and technologies being replaced with these new technologies, there is simply an addition of machines of the same kind to the already installed base. The consequence is necessarily that productivity growth tends to slow down. The rate of turnover of capital tends to rise, because the working period is shortened (not now because of higher productivity, but because two machines and two workers can produce a given level of output in half the time as one machine and one worker), which increases the annual rate of profit, but, as wages rise and the elasticity of demand rises, so profit margins are squeezed.

That is the situation that has been developing since 2012, as a new Summer phase of the long wave commenced. The situation has been complicated by the unprecedented amount of private debt that was built up since the late 1980's, which is the other side of the coin to the astronomical level of asset prices. The immediate situation has also been complicated by the sharp falls in primary product prices, due to the same kinds of rise in productivity described above, and of the consequent overproduction of those commodities.

If we take one of the most important of those commodities – oil – then like all such primary products, its price rose dramatically after the new long wave boom began in 1999. That reflected the higher demand, and inability – and indeed reluctance – to increase supply quickly. Then when prices and the profits from oil production were at their peak, the investment that had been undertaken in the intervening period, brought a huge rise in supply that was way in excess of demand, causing global market prices to fall. A similar pattern can be seen for copper, iron ore, steel, agricultural products.

But, it is dangerous to confuse the low market prices for these products, arising from a condition of glut, with a sustainable global market price, and consequently for inflation. As I set out at the start of the year there are reasons why oil producers can and will continue producing oil, even at prices that appear to be unprofitable. A large part of the cost is a sunk capital cost involved in exploration, and development of the well. Stopping production, or reducing it, will not get that capital back, quite the contrary.

Provided, prices exceed current production costs – essentially wages, and auxiliary materials – producers will tend to want, if anything, to increase production, so as to amortise the sunk costs of their fixed capital more quickly. Its only if prices fall to below those current production costs, and if small producers, who have financed their operations in the junk bond market, cannot meet their debt servicing costs, that individual firms will go bust. Even then, its possible that their productive-capital may be bought up, on the cheap by other, larger producers, for whom it will then be more profitable.

The oil price has bounced around, as I suggested it would, between $40-60 a barrel, dropping down to $37, but it may require a spike down to around $25 to clear out sufficient supply, to restore an equilibrium between supply and demand at the price of production, in the near future. Nevertheless, even without that, its likely that next year, the over production is likely to subside, as new wells do not start production, and as production from old wells declines.

With, huge amounts of liquidity sloshing around the global economy, a rise in oil prices back to the price of production of around $70-80 a barrel is likely next year, which would represent a significant increase from current levels, with a consequent pass through on to other commodity prices. The same is likely to be the case with other primary products, and the effect on manufactured goods prices.

It is the rise in these commodity prices, facilitated by excess liquidity, and in a climate of rising aggregate demand for wage goods, as employment and wages rise which will in turn cause a rise in the value of labour-power, and subsequent further rise in wages, creating the traditional price-wage spiral. Higher inflation, automatically sparks fear amongst the owners of fictitious capital, because it means that nominal revenues, quickly fall in real terms. It leads to a sell off in such assets – bonds, shares, property – causing market interest rates to rise.

Moreover, as 2007 indicated, it requires only a very small rise in such inflation to provoke such a reaction, and with interest rates at such low levels, even modest rises in interest rates, represent a large proportional rise in debt servicing costs. If interest rates move from 2% to 4%, for example, that means that your monthly mortgage payment doubles! That means that either wages have to rise substantially to meet these higher costs, at a time when, wages are failing to meet workers needs to cover housing costs, or else mortgage and housing demand collapses, causing a collapse in house prices.

In other words, we have here a reversal of the situation that has existed for the last thirty years, which favoured the owners of fictitious capital against the owners of real productive-capital, and of workers, who depended upon its expansion.

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