BHS As Microcosm

The failure of high street retailer, British Home Stores (BHS), after nearly a century of trading, is a microcosm of the British economy, and the issues I have been discussing in relation to it over the last decade, and more.

In my recent response to an article by Mike McNair of the CPGB, I made the point that the last quarter century has been an anachronism. There have been many occasions, in the last 200 hundred years, when rising rates of profit, led to low and falling interest rates, which fuelled speculative booms. But, in the past, those speculative bubbles burst, and money-capital returned to investment in productive activity, which is the only sustainable means of increasing the mass of profits, out of which the increasing amounts of rent and interest can be paid. Ever since the financial crash of 1987 that has been different.

“Rather than the period after WWII, up to the mid 1970's, being an anachronism, it is the period over the last 25 years which in many ways has been an anachronism, because it has been a period, where instead of being concerned with maximising that interest on money-capital, or rent on land, i.e. yield, the owners of this fictitious capital have instead been concerned with maximising speculative capital gains, a process which is unsustainable, and has only been sustained thus far as a result of the unprecedented levels of state intervention to keep asset price bubbles inflated.”

Increasingly, what we have seen, during that period, is that people do not buy shares in order to draw a regular amount of interest from them as dividends, or bonds to obtain coupon interest, they do not become landlords to obtain a regular amount of rent. They buy these assets in the expectation that the prices of these assets will rise, and usually rise sharply, irrespective of economic conditions.

For example, the period from the early 1980's, was one of repeated crises, followed by stagnation. Unemployment in the UK rose to well over 3 million, as high as 5 million on some estimates, and led to the People's Marches for Jobs, echoing the Jarrow March of the 1930's. The early 1990's saw further economic crises. That picture could be seen in the US and across Europe and Asia. Yet, despite this prolonged period of economic weakness and crisis, the Dow Jones Index rose between 1982 and 2000 by 1300%! By comparison, US GDP rose by just 250% in the same period. Other stock markets rose by similar amounts. In Britain, house prices quadrupled during the 1980's, despite the mass unemployment and economic stagnation.

So, its not surprising that people came to think that these asset prices always rise by huge amounts irrespective of what the economy may be doing, and to reinforce it, whenever those asset prices did fall, central banks intervened to slash interest rates, and prop them up, and governments intervened to blow up house price bubbles. It was central to an economic model whereby previously skilled, higher paid jobs in industries like steel, coal, shipbuilding and a range of engineering based industries like car production, had moved to Asia, as increasing automation had meant that the work could be done by machines which only required low skilled, low paid workers.

In place of these jobs, there grew up a large number of jobs in the UK that were low-paid, low skilled jobs in retailing, and sections of service industries. The jobs were often filled by the wives and children of the male, skilled workers who had lost their jobs in the old traditional industries. I set out this process, in my first book. 

As far as retail is concerned, merchant capitals, like BHS, obtain a share of the surplus value produced by productive-capital. Because the capital involved in selling commodities is a part of the total capital required for the production and distribution of commodities, and thereby realising the value and surplus value, i.e. it forms part of the reproduction circuit of capital, it forms a component of the total advanced capital, upon which the calculation of the general rate of profit is based. So, manufacturers as a whole sell their output to merchants at its price of production (cost price plus average profit), but this is less than its value (c + v + s), because the latter is made up of the cost price plus the total surplus value. The difference is the profit on the advanced merchant capital.

Manufacturers are prepared to sell their output to the merchants, because the merchants, as specialists reduce the costs of selling, and thereby reduce the total capital that must be advanced. As a result, although the merchant capital does not create new value, or surplus value, by reducing distribution costs, they, thereby raise the amount of profit realised, and raise the overall rate of profit.

It doesn't matter whether the manufacturer is based in the UK, and selling to BHS, or is based in China, and selling to BHS. The process is the same, and the basis of the merchant's profit is the same. A Chinese manufacturer of shirts, for example, probably even more requires a British merchant to take on the costs and responsibility of selling their shirts than does a British manufacturer, for obvious reasons arising from selling into a foreign market. BHS and other British retailers thereby obtain a share of the surplus value produced by Chinese workers, because they reduce the costs of the Chinese producers of selling their output, and realising their profit. They reduce the total amount of capital the Chinese producer has to advance, and thereby increase the rate of profit for the Chinese producers.

And, because of this there is a degree to which this is a self-sustaining model. The labour expended by shop workers in BHS and other retailers, that sells the Chinese products, may not create any new value, but it is nonetheless necessary labour. Without it, the commodities would not be sold, and without being sold their value is not realised, so they would be worthless. Similarly, as Marx describes, that labour may not produce surplus value per se, but for the same reason it does act to increase the amount of surplus value that is realised, both because without it, the value of the commodity would not be realised, and because it acts to reduce the distribution costs of commodities, and thereby increases the amount of realised surplus value, compared to if the manufacturer had to try to sell their commodities directly to consumers.

In other, words, the profits of the merchant capitals are very real profits, and what they pay out to the landlords that own the premises they rent, is thereby a very real rent, just as the interest that the shareholders, bondholders and banks, who lend money to the merchant capital, receives is very real interest. Finally, the wages that the workers in the shops receive in exchange for their labour-power is equally very real wages. In other words, all of these are real revenues, and able to be used for the purpose of consumption.

As revenues, in the initial form of wages and profit, it is value. It is value that has been paid by Chinese capital in exchange for the fact that British merchant capital has advanced capital, thereby saving Chinese capital that expense, and in exchange for the labour expended by British shopworkers, paid out of the variable capital of the British merchant capitals. As value, as revenue, it can be expended for the purchase of commodities, as can all other revenue, including for the purchase of those very commodities imported from China, and sold by those same workers, and from which the merchant obtains their profit, and out of which they also pay rent, interest and taxes.

Taking the world as a global economy. It is, in this respect, no different than a national economy. Because the labour involved in selling commodities is necessary labour, it will always be the case that a proportion of the total capital will be involved in distribution, rather than production, and that a proportion of the total labour will be employed in selling commodities rather than producing them. Theoretically, if the proportion of capital and labour employed in distribution is 20%, it does not matter whether this 20% is made up of 20% of the capital and labour in each country, or whether 80% of the globe was involved solely in production, and the other 20% was involved solely in selling that output. The profits, rent, interest, taxes and wages obtained by this 20%, would be able to be exchanged for the commodities it required for its reproduction just the same.

In practice that is not possible, because every manufacturer also needs to employ a certain amount of capital and labour in distribution – people employed in marketing offices, in offices dealing with sales of commodities to merchants, people employed in offices dealing with the purchase of productive-capital, and so on. Besides, no economy could rationally avoid producing some of the things it requires. But, that leaves a great deal of scope of variation.

At the latter part of the 1980's, in particular, as the global rate of profit rose sharply, and as that higher profit was increasingly derived from the surplus value produced in China, and a number of other developing economies, the scope opened up, for those profits to be produced in China, and realised in the UK, US, and Western Europe. Larger masses of profit were produced, but to realise these profits, embodied in increasing volumes of commodities, those commodities had to be sold, and the main markets for those commodities were in the developed economies. So, not only the potential of, but the requirement for a massive expansion of merchant capital in the developed economies was created.

That was the basis of the relentless growth of retailing from the late 1980's onwards, with the mushrooming of massive retail parks, shopping malls and so on, with what seemed like an unending duplication of stores all selling the same ranges of commodities. The problem is, as Marx describes, in order for each merchant capital to enjoy a higher rate of profit, individually, it must turn over its capital more quickly, which in turn involves selling in ever rising volumes. But, this process, as he describes, also involves a reduction of the profit margin, and a consequent effect on selling prices.

A merchant capital that advances its capital of £1 million five times during the year (£5 million of laid out capital), with a general rate of profit of 10%, operates with a profit margin of 2%, i.e. it produces £20,000 of profit on its advanced capital of £1 million, five times during the year, totalling £100,000 of profit, equal to 10% of the advanced capital. However, if it turns over its £1 million of capital ten times during the year (£10 million of laid out capital), it operates with a profit margin of just 1%, if the general rate of profit remains 10%. Even if, this capital, by so doing, was able to obtain a higher than average rate of profit of say 12%, its profit margin would still fall to 1.2%.

Similarly, the selling price of its commodities would originally have been £5 million plus 2%, equals £5.1 million. Doubling the turnover means that the selling price is £10.1 million. If the number of commodities sold was 5 million initially, that means a unit price of £1.02, and if 10 million are sold when the turnover is doubled that means a selling price of £1.01, or a near 1% fall in the selling price of commodities. The problem for retailers from such a process is fairly easy to see, especially when the global rate of profit stops rising.

This highlights another point made by Marx, which I discussed recently in my response to Mike McNair, which is that both merchant capital and financial capital are subordinated to productive-capital. As Marx points out, if the amount of capital employed as merchant capital becomes too great, the rate of profit in that sphere will fall, and capital will leave it, in order to become productive-capital. The same thing is ultimately true in relation to financial capital, but as I stated at the beginning, the last 25 years have been an anachronism, from that perspective, because during that period, the yield on financial assets, and on land has been continually declining, as the prices of those assets have been sent into one more inflated bubble after another. But, that cannot continue forever. Once again, BHS, demonstrates that fact admirably.

The whole basis of capitalism, as analysed by Marx is that capital is forced not just to physically reproduce itself on the same scale, but to accumulate additional productive-capacity. A farmer who cultivates 100 hectares of land, and employs 10 workers, might, for example, sow 1000 kg of seed. In order to continue operating on the same scale, and to continue to employ the ten workers, which are the source of his surplus value, then if productivity remains the same, he will have to continue to cultivate the 100 hectares, and out of his current output, he will have to set aside 1000 kg of grain as seed, so as to produce again next year.

Indeed, because his workers will continue to need to consume on the same level, he will need to set aside as much of his current output to provide for their needs, as they consumed this year. But, as Marx points out, in Capital III, discussing rent, the farmer knows that each year, population tends to rise, and this rise in population creates a demand for additional food. The farmer knows, therefore, that if he has the ability, he needs to rent additional land, to sow more seed, and to employ more workers to meet this increased demand. He needs to do so, because if he doesn't, other farmers will, and they will capture this larger market share. As a good capitalist farmer, he also knows that it is by being able to produce on this larger scale that savings in capital can be achieved, which means that more profits can be made, which means that more capital can be accumulated as part of a virtuous circle.

Each farmer, thereby, comes to cultivate more land, and to sow more seed out of their surplus, and to employ more workers, which soaks up the increase in population, and provides them with incomes, out of which they then buy the farmers increased output of grain. As Marx points out, its not just the capitalist farmer that is led to act in this way, but every capital.

But, looking at China recently is also instructive. The BBC recently had a report about the activities of some small Chinese peasant farmers, who for years followed this pattern described by Marx of utilising their profits to invest in increasing the output of their small farms. But, with the spectacular rises in the Chinese stock markets over the last couple of years, some of these farmers had, not surprisingly, concluded that their money profits could bring them a much better return by gambling on the purchase of shares. And, of course, that is fine for so long as those spectacular capital gains continue. But, when the Chinese stock market collapsed, those farmers lost a large chunk of their money. In the meantime, that money, which otherwise would have gone into expanding their farm, employing more workers, buying additional machines and so on was lost, and along with it was lost the economic growth and expansion of capital that would have gone with it.

BHS, is illustrative of the same thing. In 2000, the speculator Phillip Green, bought the company for £200 million. Let's be clear what “buying the company” means in this context. It does not mean buying all of the shops, the stock and other elements of the company's capital. It really means buying the controlling shares in the company. In 2000, BHS was a public limited company, but Green turned it into a private company after he bought it.

The £200 million paid for the company was, therefore, not for the purchase of additional capital, in order to increase its activities, sales and profits. It was simply a transfer to the former owners of shares in the company. The money-capital that shareholders provide to a company, like the money-capital that bondholders provide, or like the money-capital that a bank provides via a loan, is precisely that, a loan of money-capital, no different than a mortgage from a bank provided to someone buying a house. Economically, it entitles the lender to the average rate of interest. If we were to take an average rate of interest as being 5%, it would entitle Green to £10 million of interest as dividends each year.

But, illustrating another point I have discussed in my response to Mike McNair, the reality of the current state of UK company law is that shareholders can be paid any amount of money in dividends, and other capital transfers that the directors of the company decide. And, because of the state of company law in relation to corporate governance, the directors of the company are not elected by the company itself, as a separate legal entity, but by the majority shareholders, who are nothing more than people who have lent money-capital to it!

As the prices of shares have soared in the last 25 years, bubbled up on the back of money printing by central banks, so the yields on shares, as with bonds have fallen closer and closer to zero. To make up for that, company boards have simply increased the amount of money paid out as dividends, out of all proportion to the rise in company profits. And, as with the Chinese peasant farmer, the more money was paid out of profits into dividends, which were then used to buy more of the existing bonds and shares, rather than additional real capital, so the growth of capital was slowed, and the growth of profits was slowed.

But, also, the more this recirculation of dividends into the purchase of financial assets, including property, blew up those asset price bubbles, which in turn reduced the yields produced by those assets, which meant an even greater proportion of profits had to be devoted to dividends rather than productive investment, which meant that capital accumulation was slowed, and profit growth was slowed, and so on, creating a vicious circle. According to Bank of England economist, Andy Haldane, in the 1970's, the proportion of profits going to dividends was around 10%, whereas today that figure is around 70%!

But even that is minor compared to the dividends that Green and his family drew from BHS. Having bought the shares in the company for just £200 million, he and is family are reported to have received around £400 million in dividends between 2000-2004, and his wife Tina is reported to have received a dividend of a staggering £1.2 billion in 2005 alone! .

This illustrates the problem with UK company law, and the reason it needs to be changed, as was proposed by the Bullock Report in 1975. Legally, a company is a corporate individual. Bullock proposed that in line with that legal reality, corporate governance should be such that company boards should be comprised of those that worked in the company, elected by the trades unions, in equal measure to those appointed by shareholders. That is already the case for companies of more than 2000 employees in Germany. It was also proposed by the EU as part of its Draft Fifth Company Law Directive in the 1970's, which was never implemented.

In fact, there is no logical reason why shareholders should have any right to elect directors of a company, or to have any say in its operation. They are only lenders of money-capital to it. If company boards were elected on a democratic basis from all of the employees in a company, the kind of ridiculous situation of shareholders being paid massive amounts in dividends and capital transfers, and of company directors acting in the interests of those shareholders being paid astronomical salaries, and other payments, would be ended overnight.

Company boards made up of those who work for the company would have an incentive to pay only what was needed to employ corporate executives, if it was felt necessary to employ such people at at all. Similarly, they would only pay out such amounts in dividends as were required to be able to obtain money-capital through the sale of shares, i.e. equal to the average rate of interest. That would leave a large amount of the company profit that could then be utilised for actual reinvestment in productive capacity.

The final aspect of the BHS story I want to touch on is in relation to the company pension scheme. A problem in selling the company, as with the problem of selling the Port Talbot steelworks, is the massive pension deficit and liabilities to workers for future pension payments. In the case of BHS the pension deficit amounts to around £400 million, and that for Port Talbot is of a similar figure.

But, as I set out recently this is not a different phenomena, but the same one in a different guise. The reason that many companies have these huge pension deficits is because of the astronomical rise in share and bond prices in the 1990's and 2000's. The money that workers pay into their pension funds each month as a fixed amount has to be used to buy shares and bonds. The more expensive shares and bonds become, the fewer of them those fixed monthly contributions can buy.

With fewer shares and bonds being added to the pension funds, the less can be earned from the dividends and interest on them, and it is from those dividends and interest that pension are actually paid. That is compounded by the fact that with that same rise in asset prices, the yields on those shares and bonds has continually declined to near zero. What made that worse, was that in order to avoid contributing to these pension funds, when stock and bond markets were soaring in the 1990's, companies took contribution holidays, and so even less was paid into them, so even fewer stocks and bonds were bought. Instead, pensions were paid not out of revenue but out of capital, as the pension funds sold some of the shares and bonds they held, and used the proceeds to cover pension payments. It meant covering current pension payments at the expense of future pensioners.

Again, this would not arise if the workers and managers in companies exercised democratic control over them, and over the pension funds. It is high time the labour movement revisited the questions of industrial democracy, and corporate governance.