Sunday, 20 March 2016

Capital III, Chapter 29 - Part 7

For any particular shares, the demand for them will rise, the more this particular capital is able to realise larger profits than the average. So, the share price of more profitable companies will rise, and that of less profitable companies will fall. The profits of a company are referred to as the earnings – as opposed to its revenue, which comprises its sales. The price of a company's shares are related to its earnings to give the price/earnings ratio.

Competition for shares should then bring about an equalisation of these price/earnings ratios, as the share price of the more profitable companies are bid up, and vice versa. So, although modern capital, because of the frictions its mammoth size creates, in preventing the smooth and rapid reallocation of productive-capital, frustrates an equalisation of the general rate of profit, for money-lending capitalists, this is achieved, in relation to their loaned money-capital, by the continuous fluctuations in share prices, on global stock markets.

In practice, no equalisation of price/earnings ratios occurs either, for similar reasons to those Marx outlined when discussing “Grounds For Compensating”. That is that some companies are engaged in activities that are more risky than others; some are invested in businesses that are more cyclical and so on. As a result, all of these other factors are taken into consideration in determining whether the price/earnings of a particular company or sector should be higher or lower than the market average.

But, in addition to this, there are other reasons why prices will diverge, including all those relating to imperfect knowledge etc. that apply to all commodities. More importantly, however, is that speculators in shares, as with anything else, are not concerned with the revenue they can obtain from an asset, but with the potential for rapid and sizeable capital gains. Consequently, the shares in a particular company may become in demand for no other reason than the fact that they have been rising rapidly, and that momentum is enough to fuel speculation from others, who anticipate further increases in the price.

That, once again, emphasises the fictitious nature of this capital, which is always manifest at the point this speculative buying stops, and at which point the price collapses.

“Therefore, when the money-market is tight these securities will fall in price for two reasons: first, because the rate of interest rises, and secondly, because they are thrown on the market in large quantities in order to convert them into cash. This drop in price takes place regardless of whether the income that this paper guarantees its owner is constant, as is the case with government bonds, or whether the expansion of the actual capital, which it represents, as in industrial enterprises, is possibly affected by disturbances in the reproduction process. In the latter event, there is only still another depreciation added to that mentioned above. As soon as the storm is over, this paper again rises to its former level, in so far as it does not represent a business failure or swindle. Its depreciation in times of crisis serves as a potent means of centralising fortunes.” (p 467-8)

This could be seen in the financial crisis of 2008. Engels gives evidence of personal experience in this respect.

“[Immediately after the February Revolution, when commodities and securities were extremely depreciated and utterly unsaleable, a Swiss merchant in Liverpool, Mr. B. Zwilchenbart — who told this to my father — cashed all his belongings, travelled with cash in hand to Paris and sought out Rothschild, offering to participate in a joint enterprise with him. Rothschild looked at him fixedly, rushed towards him, grabbed him by his shoulders and asked: "Avez-vous de l'argent sur vous?" — "Oui, M. le baron." — "Alors vous êtes mon homme!" ("Have you money in your possession?" — "Yes, Baron." — "Then you are my man!") — And they did a thriving business together. — F.E.]” (Note 2 p 468)

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