Marmite Wars

Orthodox bourgeois economics starts from the sovereignty of the consumer. So, it starts from a position whereby market prices are primarily driven by demand, by the price that consumers are prepared to pay for some particular commodity, which in turn is an aggregation of each individual consumers subjective valuation of that commodity viz a viz all other commodities. On this basis, the suppliers of commodities can only sell those commodities for what consumers, in aggregate are prepared to pay for them. So, when Tesco and Unilever went to war over the price of Marmite, it is not surprising that all of the pundits on the business channels, portrayed the resolution of the dispute as being a necessary victory for the consumer, Tesco, rather than the producer, Unilever, even though no one actually knows what the basis of the resolution was.

In fact, reality is somewhat different to that presented by orthodox economic theory, and its unlikely that the actual settlement, in this case, was an unconditional victory for Tesco. Moreover, in the longer term, it will be the consumer who will be the biggest loser. Whilst, of course, consumers will determine their demand for any commodity according to their own preferences, and also according to the market price of a commodity, the starting position has to be the market price, because suppliers do not advance their capital for the fun of it, or to meet consumer requirements, but to make a profit on their capital, and where possible to make the maximum profit on their capital. If producers cannot make at least the average profit on their capital, over the medium term, they will not advance that capital, they will use it in some other venture where they can make the average profit, or more, or else they will use it for their own consumption and so on, which by reducing the supply of commodities in general on the market will cause market prices to rise, so that the capital advanced is able to make average profits.

In general consumers have to simply accept the market prices of commodities that confront them, and then allocate their resources accordingly to buy commodities in such proportions which then maximises their utility/welfare. Producers then allocate capital accordingly so as to match supply to this level of demand. If we take Unilever, therefore, it is not alone in facing considerably higher costs in selling its commodities in Britain, as a result of the sharp fall in the value of the Pound relative to the Dollar and Euro, following the referendum result.

Because all producers of such commodities will have faced this rise in their costs of production, or in this case, a real terms Dollar/Euro fall in the selling price of those imported commodities, the producers of these commodities will face a reduction in their profit margins, unless they are able to raise sterling prices. Unilever, and other producers of such commodities make large annual rates of profit on their capital, but because they produce in such vast quantities, therate of turnover of their capital is very rapid, and consequently the profit margins on each item of production are very small. The result is that they can quickly go from a situation of making large profits, to one of making large losses, if their selling price for each unit drops below its cost of production. These firms cannot, therefore, afford to have these margins squeezed, and that will set a limit as to how much a negotiated settlement between large suppliers and large buyers can be achieved to the benefit of the buyer.

I have no idea what the settlement between Tesco and Unilever has been, but what I would say is that yesterday Unilever put out a press release pointing out that the UK in total, not just Tesco, accounts for only 5% of its global sales. It could fairly easily find alternative markets for that 5% of its output, were the alternative to sell its production in Britain at a loss, which no firm is going to do for any length of time. That, of course, is the actual economic reality that the Brexiteers will have to face on a whole range of products. But, yesterday, I was also in Sainsbury's, where their shelves had no shortage of Marmite, or other Unilever products for sale. Ultimately, a retailer like Tesco cannot have large gaps on its shelves of everyday consumer items, when other competitors are then able to steal market share from them.

The deal between Tesco and Unilever, given Tesco's buying power, is likely to be that Unilever backed off from some of its demand for a 10% price hike on its products, but not all, whilst Tesco will have absorbed some of the actual price hike from its own profits, so as to save face, by not immediately raising its prices. But, other retailers with less market clout will not be so lucky. Moreover, other large producers such as Proctor and Gamble will also be coming forward with demands for higher prices. Some years ago, in the US, P&G and Gillette merged specifically because individually they were having pressure on their profit margins as a result of the buying power for their products from Wal-Mart. Small producers have been crushed by the market power of Tesco and other large buyers, but in the end, that simply results in those producers going to the wall, and other larger producers like Unilever, P&G and so on, absorbing their market share.

A look at reports from smaller retailers, buying from a range of suppliers shows that prices for a wide range of commodities are already rising by around 16%, as a result of the collapsing Pound. The idea that this will open up space for UK producers is also naïve. The UK economy is dominated by services, which account for 80% of GDP. Even if UK producers of manufactured goods, or food etc. could be established, they would face higher costs in most cases, for all of the imported materials, energy and so on they require, and as the cost of living rises, as inflation picks up due to the falling Pound, they will also face higher wage bills, too. In most cases, UK consumers will not stop buying the imported commodities, even at higher prices, but even if they did, it would only be to buy equally expensive, domestically produced commodities, which either way, means that UK living standards would fall unless wages rose to compensate, which would normally cause profits to fall, but with the economy awash in liquidity pumped out by the central bank, is more likely to lead to runaway inflation as happened in similar circumstances in 1965, which then leads to a sharp rise in interest rates, and a collapse in asset prices.

The Pound is likely to continue to fall as a consequence of the vote for Brexit, and the flash crash of last week is likely to be repeated each time there is some news or rumour that sweeps the markets. Already, UK holidaymakers are finding that the supposedly doomed and dire Euro is much stronger than a declining and unloved Pound, as they now get fewer Euros than they get Pounds, as they come to get their holiday money at the bureaux de change. Standard and Poor's has now said that the Pound could soon lose its status as a reserve currency, as the UK has voted to consign itself to the backwaters of the global economy. If that were to happen there is no knowing how fast and how far the Pound could sink. Already its looking set to drop below $1.20, at which point market watchers believe that it will face an avalanche of selling pressure as it triggers a series of support levels.

As has been said frequently in the last week, UK voters did not vote in the referendum to slash their living standards, or to lose their jobs. However, that is the inevitable consequence of the vote for Brexit. The vast majority of that part of the population who will have to live with the consequences, the under 45's, voted to Remain. Those who will have to live with it for longest, the 16-17 year olds, were not even given a vote, but all of the polling shows that they would have voted 80% in favour of Remain. On top of that, only 37% of the voting age population actually voted to Leave. Nearly as many voted to Remain, whilst another 30% did not vote at all.

Had the vote gone the other way, UKIP and the Eurosceptics would even now, be continuing their campaign of opposition to the EU, and calling for a further vote. There is no reason why Labour should tie its hands, and passively accept the decimation of the standard of living of British workers that is already being shown to be the inevitable consequence of Brexit. Now is the time for Corbyn and Labour to launch a campaign based upon the defence of workers rights across Europe, to launch it with other European socialists, and to demonstrate that another Europe is possible to the one Cameron wanted to impose on us, and it will be a much better Europe than the declining Britain that the Brexiteers want to impose on us.