Wednesday, 16 November 2016

Britain Is Headed For Stagflation - Part 2 of 3

The immediate cause for the rise in UK inflation is the sharp fall in the value of the Pound, as a result of the Brexit vote. However, the foundations for a rise in inflation were already there. The US has seen a rise in the Dollar, but it is seeing inflation rise even more strongly than in the UK.

For the last 20-25 years, the new technological revolution, based around the microchip, drove up productivity in industry after industry, and at the same time, slashed the value of fixed and circulating capital – also thereby causing a huge moral depreciation of the existing capital stock, which creates a surge in the annual average rate of profit – driving up the rate of profit, increasing the rate ofturnover of capital, and releasing capital, and also thereby driving interest rates to record low levels.

It meant that whole swathes of skilled and semi-skilled jobs could be undertaken by industrial robots, and huge new factories could be built in low wage economies like China, where huge reservoirs of the unskilled, robot-minding labour, now required, could be found. In the UK and US, and elsewhere, however, the arguments put forward by the right-wing populists such as Trump, or Farage that it is British or US industrial jobs that have been taken away by this cheap foreign labour, is false.

In fact, just as employment in agriculture has fallen in the UK from around 80% in the 19th century, to around 2% today, whilst the volume and value of UK agricultural production is higher than ever, so too that applies to industrial production. The value of industrial production in the UK and US is higher today than it was back in the 1960's, 70's and 80's.  It is just that a large portion of this production is now carried out much more efficiently, by new technologies that require far fewer workers, and that the nature of the production has changed, away from the old heavy industrial production.

The extent of the increase in the global mass of capital this brought about can be judged from the fact that, despite this huge rise in productivity, the global working-class doubled in size between the end of the 1980's to today, and has risen by a third just in this century alone. But, the major gains in productivity, driving down unit costs are now behind us for this Innovation Cycle. We are likely to see a whole range of new commodities developed, arising from those technologies, but these new commodities will be more for consumption rather than means of production. That has been the case with every previous Innovation Cycle.

The steam engine was developed to facilitate production and the transport of goods, before it became a means of transport for passengers. Electricity was similarly developed for the benefit of production rather than consumption, as was the internal combustion engine etc. The commodities for consumption that have so far arisen, from the latest cycle, may seem significant, from all of the electronic gadgets, personal computers, mobile phones through to satellite navigation systems, but all of these are again mostly spin-offs of technologies developed primarily to facilitate production. The real development of commodities specifically for consumption is yet to happen.

We can see some of it. Robots – though not yet quite like the androids on “Humans” - are increasingly being introduced into the home, alongside The Internet of Things. That extends outside the home into driverless vehicles, and all those devices that provide enhanced reality. In a similar vein, although the various fitness and activity monitoring devices are of dubious reliability, the pace at which implanted technology is developing to monitor people with diabetes and other conditions, and administer medication, means that the goal of massively reducing health costs, by prevention rather than cure, is fast approaching. Indeed, if the US Republicans push through the repeal of Obamacare, they will need to do so, in order to slash the costs of US healthcare, or else, those costs will cripple US capital, and make it increasingly uncompetitive as against European capital, and capital elsewhere which has the benefit of the lower costs of socialised healthcare provision.

Genetic screening costs have have fallen massively – the cost of decoding the genome has fallen from $3 billion to just $1,000! That means that personalised monitoring and treatment, via implanted technology, possibly using nano-technology, or gene-technology, becomes possible as a much more effective form of healthcare, at relatively low cost, making the old 20th century, Fordist, mass production health care systems, such as the NHS, based on treatment of ill-health, rather than its prevention, increasingly outmoded.

This in itself provides a basis for inflation, not because the prices of such new commodities will rise, on the contrary they will fall, but because it means that the pressure for the prices of many more commodities to fall, significantly, will be removed. In the 1950's, workers first began to acquire some of the less expensive new commodities that became available. They might have bought a vacuum cleaner, a twin-tub washing machine, and possibly a fridge. Even things like black and white TV's were usually rented rather than bought. In fact, as late as 1978, when I acquired my first colour TV, it was rented from the Co-op rather than bought. It wasn't until the late 1960's that significant numbers of working-class households began to acquire a car.

The significance of this is that when the range of consumer goods that workers can buy is limited, then the potential for suppliers of these commodities to sell more of them, and thereby justify increased production and capital investment is constrained. Because of the price elasticity of demand, beyond a certain level, consumers can only be persuaded to buy more if the price is reduced considerably. As Marx points out, this is not challenged by the fact that large numbers of paupers, or today those reliant on food banks, cannot provide any demand for these commodities, even at these low prices.

If large numbers of consumers cannot be persuaded to buy significantly more of the existing range of commodities, whilst others cannot afford to buy them, the possibility of higher prices for those commodities is restricted. Those who could afford to buy, but choose not to, can simply hoard their money, or, as today, use it to speculate in one way or another, in the stock, bond and property markets. But, when whole new ranges of commodities becomes available, by definition, the levels of consumption of these commodities is low, the price elasticity of demand is also low, so that small reductions in price bring about large increases in demand, but the balance of consumer spending in the process shifts towards these newer higher priced goods.

I remember, in 1975, buying my first pocket calculator, for £5, which was about a quarter of my week's wages. As a series of ranges of new consumer goods become available at prices that increasing numbers of workers can afford, it becomes possible for capital to diversify into this production, and at the same time, the vast oceans of liquidity that have been thrown into circulation, and which has inflated asset prices, will begin to flood out to fund this consumption. That is one way that all of the existing liquidity will lead to rapidly rising consumer price inflation, whilst asset prices rapidly deflate, that central banks will be unable to contain.

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