As I pointed out last week, financial markets usually move in the opposite direction to the real economy. When the economy starts to grow more rapidly, and more specifically when the demand for labour-power starts to grow more rapidly, interest rates tend to rise, because the demand for capital rises relative to the supply of capital. The rise in interest rates causes the prices of revenue bearing assets, such as shares, bonds and property to fall, because those prices are based upon the capitalised value of their revenue.
The monthly payroll data for the US, produced on Friday, showed even stronger growth than had the earlier survey data referred to in the posts last week. The number of non-farm jobs rose by 292,000, and the data for previous months was also revised higher by an additional 50,000. Just to keep pace with the normal growth of the workforce, an additional 125,000 jobs per month, approximately have to be created, but this figure exceeds that by more than double. The unemployment rate, however, didn't fall, because the participation rate increased. That again is an indication of economic strength, because it means that people who are of working age, but who for one reason or another, were not previously actively seeking employment, had now started to do so.
The US has been creating jobs at this rapid pace, for several years. But, the current month's data shows that even in terms of this high rate of jobs growth, the pace has now quickened even more. That does not seem to tally with the data on US growth. Part of the reason for that I have given in previous posts. Firstly, at this stage of the long wave cycle, we expect to see a shift away from the kind of intensive accumulation of capital, that occurs during the Winter (stagnation) and Spring (prosperity) phase of the cycle, and towards the extensive accumulation of capital.
Intensive accumulation involves the introduction of new, labour-saving technologies that replace rather than add to existing fixed capital. They are a response to the crisis of overproduction that arises, when existing supplies of labour-power have been used up, and when profits have been squeezed, as the rate of surplus value falls. These new technologies create a relative surplus population, which acts to reduce wages, and so raise the rate of surplus value. Because, this technology replaces rather than adds to existing fixed capital, and because it replaces labour, it causes the economy to grow more slowly, hence stagnation. Moreover, because it replaces labour, it creates the conditions for the operation of The Law of The Tendency For The Rate of Profit To Fall, which is one of the means by which crises of overproduction are overcome.
This new more productive technology, however, reduces wages so as to raise the rate of surplus value, and also causes a moral depreciation of existing fixed capital. Both of these factors act to raise the rate of profit. The higher productivity also increases the rate of turnover of capital, and acts to release capital. That means that the annual rate of surplus value, and annual rate of profit are raised, which facilitates increased accumulation of capital. By these means the basis of the new boom phase is established.
As this new boom phase proceeds, however, it starts from a position where a large reserve of available labour-power exists. Capital can expand rapidly, without pushing up wages, other than in some specific areas, where skill shortages may arise, for two reasons. Firstly, although capital accumulates more rapidly than in the previous period, a lot of this accumulation involves still a replacement of the old technology with the newer, labour-saving technology. Both output and employment rise, therefore, but the higher level of productivity means that the growth of the labour force is slower relatively than it would have been on the basis of the old technology. It may, however, be greater absolutely, as opposed to relatively, because the higher level of productivity means that a greater mass of surplus value exists to be accumulated, and also means that it can accumulate a greater mass of physical capital.
Secondly, the increased growth does not cause wages to rise, because during the Winter phase, a large, relative surplus population has been created, which must be used up, before labour shortages emerge. In addition, the new cycle is usually accompanied by the opening up and development of new geographical areas, in which new supplies of exploitable labour-power can be utilised - in the last period that has been most notable in China, but it applies also to other parts of Asia, and is starting to apply also to Africa.
What we see, in the US, therefore, is that the accumulation of capital is beginning to take place more on the basis of extensive accumulation, where instead of one new machine replacing two older machines, we are seeing instead, one new machine, being added to the existing stock of those same new machines. That means that productivity growth begins to slow down, and along with the accumulation of capital does not lead to the same kind of growth of production as it previously did. It also means that more labour-power is demanded.
The second reason that the employment data does not seem to tally with the growth figures is because the data provided in national accounts for the size of output is wrong, from a Marxist perspective. It only measures the value of the society's consumption fund, the amount of new value created by labour during the year v + s, whereas the real figure for the value of output includes the value of the circulating constant capital produced in previous years, and consumed in this year's production, but which must be equally replaced out of it, and thereby is not consumed, and does not form a revenue for anyone. The actual value of output is not just v + s, but c + v + s, which is the value of the circulating constant capital, plus the wear and tear of fixed capital, plus the value of variable capital (paid out as wages), plus the surplus value (paid out as profits, rent, interest and taxes). But, because the national accounts for GDP do not include this value of c, nor can they therefore, provide measurements of changes in its size, and so of its rate of growth.
Considering the growth in employment, the US looks set to create an additional 3 million jobs in the next year. On the basis of the BLS data the average annual wage is $45,280. With 3 million additional jobs that means an accumulation of variable capital of approximately $135 billion of variable capital in the year ahead. Of course, each of these workers will require materials, and other forms of circulating constant capital to process, or to work with, which gives a starting point for estimating the potential accumulation of capital in the US for the coming year.
But, with previous sources of excess revenue that found its way into global money markets starting to dry up, these additional demands for capital, at a time also when slowing productivity, is causing the release of capital, and growth of profits to slow down, will press more heavily on capital markets, causing interest rates to rise. The huge excess revenues of Saudi Arabia and other oil producing states, for example, have disappeared as oil has fallen by more than 70%. Those economies themselves need to borrow in the capital markets, where previously they dumped petro-dollars into them. China, is seeing its currency come under pressure, at a time when it really needs it to rise, so as to shift the balance of its economy away from exports to the development of its domestic economy. It needs, therefore, to raise its own interest rates, and to repatriate much of the vast amounts of revenue it expended on purchasing US, UK and other financial assets.
That again means rising market rates of interest, and falling prices for fictitious capital. That is why, when the US announced such a strong growth of jobs on Friday, the US Stock Market fell by around 200 points.
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