In the first article, John Weeks examines the assumption that finance capital rules Britain. That is an assumption that was made by Mike McNair in his recent articles in the Weekly Worker, and which I responded to recently. Weeks sets out the basis of the assumption.
“1) the large amount of revenue generated by the City makes the UK government beholden to finance capital; 2) finance funds the Conservative Party and strongly influenced Labour under Blair and Brown; and 3) the economic power of finance is so great that no government could take the political initiative to reform the City.”
He summarises his response, as follows.
“By the most liberal interpretation the first of these is an exaggeration. However, the second gained empirical support from a recent study estimating that half the contributions to the Conservative Party come from the City. The third allegation posits an all-pervasive power of the City working through MPs, the media and business economists to influence and constrain policy discussion such that debate rarely emerges.”
I think that this is correct. It brings out the distinction I have set out previously between the actions and policies of the state, which ultimately must defend and further the interests of the dominant form of capital, and the actions and policies of governments and political parties, who represent the interests of the particular class fractions, upon which they are based.
Weeks also focusses on another issue which I have described over the last few years. It is the difference between the actions of interest-bearing capital, in seeking yield, and its actions in seeking capital gain. Ultimately, interest-bearing capital can only survive by extracting yield – that is why it is called interest-bearing capital. As Marx describes, in Capital III, all interest-bearing capital is not capital in the true sense, but is only fictitious capital. It does not, and cannot simply self-expand its own value. Only productive-capital can do that, and interest-bearing capital is only able to obtain interest, in the end, because productive-capital produces surplus value, a part of which is appropriated by the money-lending capitalists.
Interest-bearing capital can only, ultimately, increase the mass of interest payable to it, if the mass of productive-capital expands, and the rate and mass of profit expands, so as to produce the potential for a greater mass of interest to be paid. The money lenders can at times obtain a higher yield, when the demand for money-capital outstrips the supply at current interest rates, but if the proportion of surplus value going to interest rises at the expense of the proportion going to profit of enterprise, and available for accumulation – what Haldane describes as “capital eating itself” - then productive-capital will not accumulate at the rate it should, and so the mass of surplus value will grow more slowly than it should, which thereby undermines the basis for the interest-bearing capital obtaining future rises in revenue.
Yet, as I have written previously, at times, this interest-bearing capital has no concern about low yields. Instead, it is only concerned with obtaining large, quick capital gains from speculation. The two things go together. Speculation causes asset prices to rise, creating the potential for speculative capital gains, whilst the much higher asset prices, cause yields to shrink, because yields move inversely to asset prices, as a consequence of the process of capitalisation. So, landlords buy London property, not because they have any desire to obtain the rent on it, but because they believe that next year the price of the property will have risen by 20%. The rent itself may be high in absolute terms and yet produce a low yield, as the property price rises. For example, a property with a price of £100,000 may produce a rent of £10,000 a year, giving a yield of 10%. The absolute level of rent will be determined by a range of factors such as demand for rental properties, the level of income of potential renters and so on. If rents rise to £12,000, but speculation causes property prices to rise to £200,000, then the yield will have fallen to 6%.
In fact, its this same process, in relation to shares that results in shareholders using their power through the boardroom to push up dividends, and other capital transfers beyond what is justifiable in economic terms, and which results in the phenomenon of “capital eating itself”. As Weeks puts it,
“That type of an economy, produce then distribute with finance facilitating production, ended with the Reagan-Thatcher financial deregulation, deregulation extended under Clinton and Blair. Policy change, not “globalization”, liberated financial capital to break free of the production-distribution cycle which severely limited its potential for profit-taking. Suddenly, financial capital had a new and powerful mechanism to garner profit, speculation.”
Weeks describes the motivation for this in the same terms, I have described previously. Why would you use your available capital to engage in productive activity, which is uncertain, and requires a long-time before it provides any return on the capital invested, when instead you could speculate by buying a house, a share or bond, which you expect to see rise in price by 10%, 20% or more, in a year. That is especially the case when those asset prices are being underpinned by central bank policies of money printing, and government policies to goose property prices. And by this means the economy becomes made synonymous with the stock, bond and property markets. That identity is enforced by the media.
“The pervasive control of the UK economy reveals itself in what passes as economic news, more correctly named “speculation news”. Since the beginning of 2016 the media’s reporting of the movement in stock markets has reached the point of obsession. Each day’s business news headlines focus on whether these market indices fall or rise. Commentators present a fall as a harbinger of disaster, with a rise provoking optimistic cheers that we escaped disaster.”
Yet, the reality is that the economy and the financial markets are generally inversely related. If potential money-capital is diverted into speculation in financial assets, pumping up those prices, that is money-capital that is not going into the accumulation of productive-capital, so as to expand the production of new value and surplus value. If financial capitalists use their power, for example as shareholders, to boost the proportion of surplus value going to dividend payments, to compensate for falling yields, this again undermines capital accumulation.
As Marx puts it,
“... profit of enterprise is not related as an opposite to wage-labour, but only to interest.” (Capital III, p 379)
Michel Husson, in his article, makes a similar point.
“In the “financial sphere”, quantitative easing is feeding stock-market bubbles rather than productive investment, which is stagnating. And the mere prospect - held back so far - of a renewed rise in Fed interest rates hangs like the sword of Damocles and is destabilising the currencies and markets of many countries. In short, “Uncertainty, Complex Forces Weigh on Global Growth”, to quote the IMF's formula in its latest survey.”
Husson again makes the same point I have made in the past, and which I make in my book “Marx and Engels' Theories of Crisis”. That is that as a response to a credit crunch, and lack of liquidity, injecting liquidity is absolutely the correct thing to do, to cut short its effects on commodity circulation, and economic activity. But, once that has been achieved, continuing to throw additional liquidity into circulation, as an alternative to resolving an underlying problem of insolvency of banks and financial institutions only exacerbates the problem. The insolvency of those institutions was created on the back of an astronomical growth of fictitious capital, and the prices of financial assets and property. The insolvency was hidden by the continued inflation of those asset prices, and the process of “extend and pretend”. The 2008 financial crisis, exposed the underlying problem – one that resides in the financial and property markets and not in the real economy – but central banks and governments, that have become closely tied to those interests have responded by simply greater doses of money printing, and even greater delusion through a further policy of “extend and pretend”.
In reality, the crisis of 2008, was like those financial crises of the 18th century, that Marx discusses, and which were the basis of the theories of crisis of people like Ricardo. That is they were crises centred in the financial markets, where banks printed more banknotes than they could back up with their own capital. That led to speculation, and financial bubbles – like Tulipmania, and the South Sea Bubble, and John Law's Mississippi Scheme. That is different to the kind of economic crisis resulting from overproduction, which Marx theorises, and which first broke out in 1825. As Marx puts it, a financial or money crisis, always appears as part of an economic crisis, because the latter causes a failure of payments – a crisis of the second form, as Marx calls it – but this is different from the above kind of purely financial crisis.
“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.” (Capital I, Chapter 3, note 1 p 137)
In fact, the process of money printing or quantitative easing, another round of which has been undertaken today by Japan, where the central bank has introduced negative interest rates, has actually been a major cause of economic slowdown, for the reasons set out above. It has backstopped financial speculation, which diverts potential money-capital away from productive investment, and into speculation, to buy up existing shares, bonds and property, so as to inflate their prices further. The only purpose for that is to protect the interests of the current owners of those assets, from a decimation of their fictional wealth. But, it does so by restricting the wealth of the rest of society, by reducing the potential accumulation of productive-capital and profits. It has, in fact, as a result been a significant contributor to the deflation of commodity prices in general, a deflation which it contends it is designed to counter!
As Husson puts it,
“The inefficacy so far of monetary policy can be explained by various mechanisms or secondary effects which weigh upon the current conjuncture. To start with, this injection of money is blind and nothing guarantees that the liquidity will be used in a manner that is favourable to investment. On the contrary, it will feed speculation and provoke an increase in asset prices which will benefit only the richest and which will lead to the creation of a bubble.”
But, the reality is that this is not a failure of policy. The policy never was intended to spur economic activity. Its purpose was always to protect the interests of the existing owners of fictitious capital, at the expense of productive-capital, and the rest of society. As Marx puts it,
“The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.” (Capital III, Chapter 33)
Husson is wrong to say, “Quantitative easing simultaneously leads to a reduction in interest rates”. This is a fallacy that goes back to John Locke and William Petty, and confuses money and capital. QE, enables the central bank to purchase some bonds, and thereby to raise their price, and so reduce the yield on those bonds, but they can only thereby affect those prices and yields, not the prices of all other financial assets, and yields. The average rate of interest cannot be altered by simply printing more money, and thereby reducing the value of money, because all this does is to change the units of measurement by which the demand for, and supply of money-capital is undertaken. The rate of interest is the market price of money-capital, determined by this interaction.
If the current rate of interest is 6%, and at this rate there is a demand for money-capital of £100 million, and likewise a supply of money-capital also of £100 million, then the 6% will be a stable equilibrium rate. If the supply of money-capital rises, because for example realised profits rise, which are thrown into the money market, then the rate of interest will fall, and that will cause the demand to rise, until a new equilibrium rate is established. But, if more money is simply printed, this just depreciates the currency. If the amount of currency is doubled, and the velocity of circulation remains constant, then all money prices are simply doubled – overall. In that case, the £100 million of demand for money-capital (required to buy buildings, machines, materials, labour-power) will now be represented by a money price of £200 million. Similarly, the money supply measured by this new devalued money value will also be equal to £200 million, so the equilibrium rate of interest remains 6%.
As Marx puts it,
“Hume attacks Locke, Massie attacks both Petty and Locke, both of whom still held the view that the level of interest depends on the quantity of money, and that in fact the real object of the loan is money (not capital).
Massie laid down more categorically than did Hume, that interest is merely a part of profit. Hume is mainly concerned to show that the value of money makes no difference to the rate of interest, since, given the proportion between interest and money-capital—6 per cent for example, that is, £6, rises or falls in value at the same time as the value of the £100 (and. therefore, of one pound sterling) rises or falls, but the proportion 6 is not affected by this.”
The real basis of the very low interest rates seen over the last thirty years, is not money-printing, but has been the massive increase in the supply of money-capital, resulting from the sharp rise in the rate and mass of profit, which occurred from the late 1980's onwards. That has helped feed into the speculative frenzy, as it has in previous times. For example, in 1847, as Engels sets out, there was an economic boom, high rates and masses of profits to be made, and yet quick, large capital gains could be made from speculation in railway shares. So, capitalists starved their businesses of investment to speculate in those railway shares, until a rise in interest rates caused the bubble to burst.
Not only have companies engaged in such financial speculation by using resources to buy back shares, buy the shares of other companies and so on, but private households have engaged in the same kind of speculation, particularly in relation to property. The consequence is that although all the focus is on government debt, the real problem resides in the massive explosion of private debt. Household debt has risen from around 80% of income in 1987, to around 160% today. This massive overhand of debt, is also a major reason for the sluggishness of growth.
Husson also points to another factor that I drew attention to about three years ago, which is the change in productivity levels. I argued back in January 2013, that a conjunctural shift in the long wave had taken place to the Summer phase. That means that the period of intensive accumulation, as new technologies developed in the 1980's were rolled out as replacement for labour and former technologies, comes to an end, as that new technology has become pervasive. Along with it, productivity does not rise so fast, further capital accumulation brings with it, a greater demand for labour-power, which pushes up wages and squeezes profits. A shift towards the production of wage goods arises to meet the demands for this greater quantity of workers, and their higher wages. The demand for capital rises, at a time when profits are being squeezed, which leads to a rise in interest rates which crashes financial asset prices, via the process of capitalisation.
In the end, it is production and productive-capital, which is the mainspring of capitalism, and not financial capital, which remains subordinated to it.
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