Saturday, 19 March 2016

Capital III, Chapter 29 - Part 6

Marx then turns his attention to the other example of capitalisation in the form of labour and wages. Using the previous method, if wages are £50 for a year, and the rate of interest is 5%, then its argued that these wages are the return to the worker of his human capital of £1,000! Marx quotes Von Reden,

“"The labourer possesses capital-value, which is arrived at by considering the money-value or his annual wage as income from interest.... Capitalising ... the average daily wage at 4%, we obtain the average value of a male agricultural labourer to be: German Austria, 4,500 taler; Prussia, 4,500; England, 3,750; France, 2,000; inner Russia, 750 taler." (Von Reden,Vergleichende Kultur-Statistik, Berlin, 1848, p. 434.)” (Note 1, p 465)

This kind of talk about human capital is common amongst bourgeois apologists who seek to dissolve the essential distinction between capital and labour. But, they are not alone. Some years ago, I pointed out to Mike McNair, the error of his conception in this regard.

“The insanity of the capitalist mode of conception reaches its climax here, for instead of explaining the expansion of capital on the basis of the exploitation of labour-power, the matter is reversed and the productivity of labour power is explained by attributing this mystical quality of interest-bearing capital to labour-power itself. In the second half of the 17th century, this used to be a favourite conception (for example, of Petty), but it is used even nowadays in all seriousness by some vulgar economists and more particularly by some German statisticians.” (p 465)

Marx points out two rather obvious problems with this concept in relation to labour-power.

“In the first place, the labourer must work in order to obtain this interest. In the second place, he cannot transform the capital-value of his labour-power into cash by transferring it. Rather, the annual value of his labour-power is equal to his average annual wage, and what he has to give the buyer in return through his labour is this same value plus a surplus-value,i.e., the increment added by his labour.” (p 466)

But, its not just these capitalised values of revenue streams that constitute fictitious capital. The shares issued by companies provide money-capital in return, which is then used by the company to buy productive-capital. In other words, this exists as real capital. However, Marx points out, it does not exist twice, once as actual capital and once as shares in the business. It only actually exists as the productive-capital. The shares exist only as a title to ownership of a portion of future profits, equal to the average rate of interest on the money-capital loaned by the shareholder.

Its for this reason that the prices of these shares move up and down dependent upon the anticipated profits to be earned by the company and disbursed as dividends to shareholders.

“The independent movement of the value of these titles of ownership, not only of government bonds but also of stocks, adds weight to the illusion that they constitute real capital alongside of the capital or claim to which they may have title. For they become commodities, whose price has its own characteristic movements and is established in its own way. Their market-value is determined differently from their nominal value, without any change in the value (even though the expansion may change) of the actual capital. On the one hand, their market-value fluctuates with the amount and reliability of the proceeds to which they afford legal title. If the nominal value of a share of stock, that is, the invested sum originally represented by this share, is £100, and the enterprise pays 10% instead of 5%, then its market-value, everything else remaining equal, rises to £200, as long as the rate of interest is 5%, for when capitalised at 5%, it now represents a fictitious capital of £200.” (p 467)

This relates back to a point made earlier that funds always move between bonds and shares. The yield on bonds, as an average, reflects the prevailing interest rate, determined by the demand and supply for money-capital. The actual yield of any class of bond, or any particular country or company, may diverge from the average due to specific conditions of risk. But, similarly, this yield, specifically the so called risk free rate, available on the most creditworthy bonds, sets a minimum for the average yield to be expected from the ownership of shares.

If I can own a 10 year US Treasury Bond, that will pay me 5% p.a. interest, with no risk of losing my money, there is no apparent reason why I will own a share that only pays me 5% or less in dividends, when I have a risk of losing my money, if the company goes bust, or its profits fall significantly.

But, as Marx says here, if economic conditions improve, and businesses make larger profits, which are paid out in dividends, then these dividends will represent a larger yield, as against their current prices. Funds will move out of bonds and into shares to obtain this higher yield. Bond prices will fall, pushing bond yields higher, whilst share prices will rise as the demand for shares rises, pushing dividend yields lower.

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