Thursday, 20 October 2016

Profit, Rent, Interest and Asset Prices - Part 8 of 19

When the rate of profit is high, the demand for money-capital will be high, but that same high rate of profit also means that the realised profits assume the form of potential money-capital. Firms may utilise it internally for accumulation, or else they may throw it into the money market. So, the supply of money-capital may also rise, causing the rate of interest to remain low, or even fall. Only when the demand for money-capital begins to outstrip the supply will interest rates rise. There is a constant interrelationship pulling in different ways, as was the case described above in relation to the rate of profit, accumulation of capital, demand for labour-power, movement in wages, and consequent changes in the rate of profit.

Here, rises in the rate of profit lead to a higher demand for money-capital for capital accumulation, but the higher rate of profit increases the supply of money-capital too, when interest rates do rise, the higher rate of interest causes the owners of money-capital to supply more of it, whilst industrial-capitalists seek to demand less of it, as higher interest payments reduce the ability for industrial capital to accumulate. As Marx describes all these interrelations, in Capital III,

“To this confusion — determining prices through demand and supply, and, at the same time, determining supply and demand through prices — must be added that demand determines supply, just as supply determines demand, and production determines the market, as well as the market determines production.”

(Chapter 10)

The basis for the increased supply of money-capital, when interest rates rise is clear. The profit produced by productive and commercial capital is divided into a number of different revenues. Landlords obtain rent from the productive and commercial capitals for the land that is leased by them; the owners of shares or bonds, obtain interest on the money-capital they have loaned; the functioning capitalists obtain profit of enterprise. Part of these various revenues must always be used by the recipients as revenue. In other words, as Marx points out in Capital II, simple reproduction always remains at the heart of capitalist reproduction, because the individual capitalists, and other appropriators of surplus value, must consume to reproduce themselves.

This too is a contradictory process. On the one hand, as capitalism develops, the capitalists begin to get a taste for the high life, and standard of living of previous ruling classes. On the other hand, the demands of competition mean that individual private capitals must accumulate capital from profits, rather than consume it unproductively, in order to retain and expand market share, so as to survive.

“It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integrate part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production. It will never do, therefore, to represent capitalist production as something which it is not, namely as production whose immediate purpose is enjoyment or the manufacture of the means of enjoyment for the capitalist. This would be overlooking its specific character, which is revealed in all its inner essence.”

(Capital III, Chapter 15)

On the other hand, the continual revolutionising of technology and production that raises productivity and makes possible this increased rate of expansion, also reduces the value of commodities. The reduction in the value of commodities not only reduces the value of the constant and variable capital, so that any given mass of surplus value will buy more of those commodities, but it also reduces the value of all those commodities that the capitalists and other exploiters consume unproductively. Consequently, the proportion of the revenue that must be allocated to this simple reproduction is reduced, enabling that revenue to be transformed into additional money-capital.

When interest rates are high, they are more likely to convert their revenues into money-capital loaned to industrial capitalists for productive purposes. So, the supply of money-capital would rise pushing down on interest rates.

When interest rates are low, the owners of this potential money-capital are more likely to consume their revenues, be they in the form of rent, interest, or profit of enterprise, unproductively, whether it is buying more luxury goods, or engaging in financial speculation and other forms of gambling. Or they may utilise these revenues directly themselves as productive-capital so as to produce profit. In that case, the supply of money-capital would be reduced, pushing up on interest rates. 

“It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.” 

(Capital III, Chapter 23, p 378)

Considered globally, for example, huge reserves of potential money-capital have been accumulated in sovereign wealth funds. A lot of the money that flows into these funds comes from rents received by oil or other primary product producing countries. A proportion of those funds goes as actual loanable money-capital. In other words, it buys newly issued bonds or shares, which provides money-capital to businesses across the globe, which is then metamorphosed into productive or commercial capital. But, another portion has also been utilised for speculation, that is simply buying up, at inflated prices, existing bonds and shares, and other assets.

These sovereign wealth funds, in turn, as owners of fictitious capital, also obtain revenues in the shape of interest. They receive payments of coupon interest on the bonds they own, and dividends on the shares they own. This revenue, as interest, can also be utilised either as actual money-capital, that is metamorphosed into productive and commercial capital, or else can again be used for speculation, to again buy up existing bonds and shares, thereby pushing those prices higher once more. In addition, a country like Norway, which has a very large sovereign wealth fund, built up from the rents from oil production, may also utilise the revenue stream it produces to finance government expenditure to cover things such as pensions, and other welfare payments.

Similarly, countries like Norway, Russia and Saudi Arabia, utilised the rents they received from oil and other primary production to directly finance state expenditure. When primary product prices were high, these rents could finance this expenditure whilst leaving large surpluses available to be built up within the sovereign wealth fund. As primary product prices have collapsed – itself a consequence of previous capital over-accumulation, resulting from high prices and profits in those sectors – although the states continue to obtain rents, those rents have shrunk, and a greater proportion of them is required to finance state spending – consumption/revenue – leaving a smaller proportion available for conversion into money-capital. In the case of Saudi Arabia, it has gone from being a huge provider of potential money-capital, to being a borrower of money-capital, so as to finance its state spending.

But, the main form of wealth for private capitalists today, of the 0.001% of the population in each country, is that of fictitious wealth, of fictitious capital in the shape of shares and bonds, and property. Although, the astronomical inflation of these asset prices has caused a corresponding drop in yields on these assets, for that tiny minority that own these assets on such a huge scale, the actual amount of revenue they obtain is still huge. Take someone like Bill Gates with a personal fortune of around $40 billion. Even if he obtained a yield of just 1% p.a., on those assets, it would mean a revenue of $400 million a year, way beyond what any individual could rationally require, even with the most lavish of lifestyles.

In a global population of 7 billion the top 0.001% amounts to around 70,000 people with a similar amount of fictitious wealth as Bill Gates, and similar levels of revenue, or around $28,000,000,000,000 ($28 trillion of income). By comparison, global GDP, i.e. the new value created by labour, during the year, is around $70 trillion. These individual private money-capitalists, therefore, have huge annual revenues at their disposal in the form of interest and rent, which can be utilised either for unproductive consumption, for speculation, or else to be converted into actual money-capital. A marginal decision one way or the other to convert this revenue into money-capital, rather than to use it unproductively for consumption or speculation, therefore, can have a significant impact on the supply of money-capital.

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