The Bitcoin Bubble

The price of Bitcoin has soared to a record $11,000. It is up more than 800% this year. A look at a chart shows that its parabolic rise, is typical of every other such asset price bubble, in the past, at the point where it is about to burst. There is reportedly a record level of Google traffic about buying Bitcoin using credit cards, as a bunch of bigger fools enter the market at the top, ahead of the bust, to buy an overpriced asset using credit, again a feature of every previous bubble just before it burst. In the next few weeks, the Chicago Mercantile Exchange will start trading Bitcoin Futures, again not only allowing all of the bigger fools to enter to buy into the bubble using derivatives, but will also allow people who recognise the bubble for what it is, to enter to short it. A lot of people on one side of this trade will lose a lot of money, whilst a small number of people on the other side of the trade will be happy to take that money off them. As with all such financial panics, there is no reason why this should have any impact on the real economy.

One commentator on Bloomberg the other day noted that Bitcoin was definitely in a bubble, and that when such bubbles burst, the price falls typically by around 80%. Quite true, and I have myself said in the past, that I expect the price of property to fall by 80% from its peak, and I expect similar falls in stock markets, and bond markets, in real terms. In 2000, when the NASDAQ bubble burst, it dropped by 75%, for example. However, the Bitcoin bubble is different. When Tulip bulbs soared in a similar bubble during the Tulipmania, the bursting of the bubble saw a similar collapse in the price, but tulip bulbs did at least have some value. Land has no value, because it is not the product of labour, but it does have a price, because it has a  use value, as a necessary instrument of production, whether to be used for the growing of crops, the mining of minerals, or on which to stand factories etc. The price of land is the capitalised capitalised rent it produces, and so long as the land continues to have a use value, in this way, it will always have a price greater than zero. In the case of property, its price is not only composed of the price of the land it sits on, but also the actual value/price of production of the building itself, determined by its current cost of reproduction. Bonds and shares have no value, they are only fictitious capital, but like land they have a price, equal to the capitalised revenue (dividends, coupon) they produce. So, long as the underlying real capital, on which they have a claim continues to exist, so as to produce profits, or so long as the state that issues them continues to be able to raise taxes to pay the interest, they will always have a price greater than zero.

But, that is not true of Bitcoin. Not only does it not have any value, but there is nothing stopping its price going to zero. For something to have value, it must fulfil two conditions. Firstly, it must be a use value, secondly, it must be the product of socially necessary labour. But, the only use value of Bitcoin is actually to act as an asset, and it can only act as an asset so long as it is considered to have value, or at least to have a price. Bitcoin can be said to be the product of labour, in that it requires miners to dig it out, but its price does not derive from this labour, but from the fact that it is in artificially constrained supply. In other words, it is the consequence of monopoly. But, there is nothing stopping someone creating another crypto-currency, and they have, and that means that, although the supply of Bitcoins may be limited, the supply of crypto-currencies in general is not limited.

Bitcoin has some similarity with gold in that although both are constrained in supply – one by its natural rarity, the other by a deliberately engineered scarcity – once created they are not destroyed, and so remain in supply. The difference is that gold besides being a form of currency, is also a commodity, and a use value. Whilst gold is being used as money, that is its only use value, it gives up all of its use value as a material to be used in jewellery, to be used in high-end electronics and so on. However, it could only become a currency, could only become the money commodity in the first place, because it is also a commodity, is a use value, with a value determined by the labour-time required for its reproduction. Gold will always retain this value as a commodity, even where it is not used as an asset or as money. The price of gold may be driven above its exchange value /price of production, as a consequence of an asset price bubble, and by the fact that its supply is constrained, and similarly when such a bubble bursts, the price of gold can sink below its exchange value/price of production, but the value of gold can never sink to zero, precisely because it is a use value, is a commodity, and does require labour for its production. That is not true for Bitcoin. If Bitcoin is not used as currency – and in fact, it does not even possess the qualities required to be a currency – or used purely as a financial asset for speculation, then it has no other use value, and any labour expended on mining it, is simply unnecessary labour, which produces no value. There is no reason, therefore, why the price of Bitcoin cannot go to zero, unlike any of these other assets, which have all, and many currently also are the subject of speculation, and whose prices have been driven into similarly astronomical bubbles waiting to burst in catastrophic fashion.

Proponents of Bitcoin describe it as currency, but it is not. Currency is money in circulation, the word currency itself deriving from the French word, which also gives us current, as in a flow of water. But, to act as currency, therefore, it must first be money, and money is nothing more than the universal equivalent form of value. What is value? Value is labour, and the measure of value is labour-time . But, value can also be measured indirectly in terms of how much of some other commodity, one commodity exchanges for, in other words its exchange-value. Money is simply this exchange-value stood up on its hind legs, and assuming physical form, so that instead of measuring the value of any product/commodity directly by the amount of actual socially necessary labour-time it represents, or by measuring it indirectly by the quantity of other commodities it can command, it is simply measured in terms of this one single commodity, which everyone agrees to accept in exchange for any other commodity. Bitcoin is not currency, because it is not accepted as a universal equivalent form of value.

When someone says that the price of a litre of wine is £1, the origin of this price goes back to the quantity of the money commodity, in the case of Pounds to silver (the name Pound Sterling comes from a Pound of Sterling silver), whose equivalent it represents. If we ignore the question of commodities under capitalism exchanging at prices of production, rather than at their exchange values, what it means is that a litre of wine has the same value as a Pound of silver. What gives these two different things this equal value? It is that they both require the same amount of social labour time for their production. When A exchanges a litre of wine for a Pound of silver, and B likewise exchanges a Pound of silver for a litre of wine, what they have both, in fact, exchanged is an equal amount of social labour-time. What appears as a relation between things, wine and silver, due to commodity fetishism, is, in reality a relation between people, and the labour-time they undertake.

Precious metals such as gold and silver take on the role of money commodity, of being the universal equivalent form of value, precisely because they themselves have value, they are commodities that have use value, and possess value. Where money differs from other commodities, is that, as currency, it takes on this specific role. The wine maker who exchanges 1 litre of wine for 1 Pound of silver, does not do so, because they want silver as a use value, in the way that the jeweller might do, for example. They want the silver only for its use value as money, for the fact that it can be exchanged for any other commodity, for example, so that the wine producer might buy bottles, for their future production, or might buy food to enable their own personal consumption. Money, thereby enables its owner to have command over an equal amount of value/social labour-time in any other form, and as such that money can be stored, for such future use. Money, in whatever physical form it assumes, including the form of electronic digits in a bank account, is then merely a claim to a certain amount of labour-time.

Money takes the form initially of some physical commodity, be it cattle, gold or silver because those who engage in trade, need some commodity whose value they can determine, and whose value is also thereby assured to be able to continue to give them this claim over social labour-time. Money, thereby goes back in history to a period long before the establishment of governments and states. When states arise, they also appropriate to themselves the function of determining what is money, and exercising control over the money-supply. The manifestation of that is that the money commodity itself takes on the form of the coin, minted and put into circulation by the state. 

But, the reality is that it is not the value of the coin itself that is determinant, but the amount of value/the amount of social labour-time, it nominally represents. If silver is the money commodity, and 1 Kilogram of Silver is given the name £1, which is also equal to 100 hours of labour-time, if I produce a silver coin that contains only 100 grams of silver, but which I likewise give the name £1, so that I am saying that it has a claim on 100 hours of labour-time, this coin can fulfil exactly the same function as did the 1 Kilogram of silver, but does so at much less cost. If, on the other hand, I produce 10 of these coins and put them into circulation, so that I have put into circulation a claim to 1,000 hours of social labour-time, it is clear that these coins cannot all fulfil that function. What will happen is that whatever the face value of these coins says, of giving a claim to 100 hours of labour-time, each coin can only exert a claim on only a tenth of that amount, because only 100 hours of labour-time exists as its counterpart. The price of every commodity would then rise tenfold, so that a litre of wine instead of having a price of £1 would have a price of £10. In other words, there would be an inflation of prices.

The important point here then is that it is irrelevant how much value is actually contained in the coin or other money token. Silver coins whose silver content had been worn away to a fraction of their nominal silver content always continued to circulate at the full value of the coin. What is decisive is the nominal amount of social labour-time that the money token purports to have a claim on, and the quantity of such tokens put into circulation. When a Bank of England Pound Note, said that the Bank Governor, promised to pay the bearer a certain quantity of gold, all this actually meant was that the Bank promised to pay the bearer a quantity of value, i.e. a quantity of social labour-time, whose physical manifestation was a given quantity of gold.

This is why fiat currencies can work just as effectively as a currency based upon some money commodity such as gold. Rather than saying that the Bank of England promises to pay the bearer a quarter of an ounce of gold, all that is required is for it to say that the Bank promises to pay the bearer 10 hours of social labour-time, or what amounts to the same thing that the note can be exchanged for any commodity that bears the same amount of value. Indeed, as Marx says in The Critique of the Gotha Programme, when money itself has disappeared, let alone any connection of it to gold or silver, this basic relation will continue, with each person being given a certificate entitling them to a certain quantity of social labour-time, proportionate to the value they have themselves created by their labour, and they will then be able to exchange these certificates for products to an equal amount of value/labour-time.

“... and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labour cost. The same amount of labour which he has given to society in one form, he receives back in another. 

Here, obviously, the same principle prevails as that which regulates the exchange of commodities, as far as this is exchange of equal values. Content and form are changed, because under the altered circumstances no one can give anything except his labour, and because, on the other hand, nothing can pass to the ownership of individuals, except individual means of consumption. But as far as the distribution of the latter among the individual producers is concerned, the same principle prevails as in the exchange of commodity equivalents: a given amount of labour in one form is exchanged for an equal amount of labour in another form.” 

In this situation too, were it the case that some unscrupulous person or group of people engaged in forgery, and produced a large quantity of these certificates, the same inflation would occur, because the nominal demand for goods and services, in terms of the amount of social labour-time demanded in exchange for these certificates, would exceed the quantity of value of goods and services available to meet that demand. Shortages would arise, and as always happens in such circumstances, that in turn enables other groups of unscrupulous individuals to establish a black market for those goods and services in short supply, for which queues have formed, and on this black market, the price of these goods and services rises way above their nominal price in the official stores.

In effect, this is what the Stalinists did in Russia in the 1920's, when they believed they could create value out of nowhere by simply printing excess currency. As Trotsky remarks in The Revolution Betrayed,

“The platform of the Opposition (1927) demanded “a guarantee of the unconditional stability of the money unit.” This demand became a leitmotif during the subsequent years. “Stop the process of inflation with an iron hand,” wrote the émigré organ of the Opposition in 1932, “and restore a stable unit of currency,” even at the price of “a bold cutting down of capital investments.” The defenders of the “tortoise tempo” and the superindustrializers had, it seemed, temporarily changed places. In answer to the boast that they would send the market “to the devil”, the Opposition recommended that the State Planning Commission hang up the motto: “Inflation is the syphilis of a planned economy.”” 

(Chapter 4)

All that is required for a fiat currency to function effectively is that the quantity of it put into circulation should be limited to the amount of social labour-time, it nominally represents adjusted for the velocity of circulation. In other words, if £1 is designated as representing 10 hours of social labour time, then if the velocity of circulation is 10, then ten £1 notes will circulate 1,000 of social labour-time. If instead 11 notes are put into circulation, this would represent 1,100 hours of social labour-time, and consequently prices would rise by 10%. In fact, a look at consumer prices over the last 20 years shows that the more or less worthless paper dollar has been a much more stable measure of value than has gold. In 1999, the price of gold stood at $250 an ounce, but within a few years it had risen to $1,000 and ounce and by 2011, stood at nearly $2,000 an ounce. This rise in the price of gold was due neither to a fall in the value of the dollar, or a rise in the value of gold, any more than when the price of gold fell from $2,000 an ounce after 2011 back to $1200 an ounce, that was due to a fall in the value of gold, or a rise in the value of the dollar. It was due to speculation in gold. Had gold been used as a measure of value during that period rather than paper dollars, prices would have been all over the place, on an almost daily basis. 

But, at the same time, it has been the oversupply of dollars and other currencies, which has also created the basis for such speculation, whether it is in gold, bonds, shares, property or Bitcoin. All of these bubbles will burst, and probably the bursting of one, will be the catalyst for the simultaneous bursting of them all.

Theories of Surplus Value, Part II, Chapter 10 - Part 15

It is not that the value of the commodity is varied, as a consequence of a different organic composition of capital, or a different rate of turnover, but that the prices of production are determined by these variations, and that consequently these prices of production must then vary from exchange-values, in order that an average rate of profit, on these capitals, is obtained. However, as demonstrated in Capital III, if we totalled up all of the prices of production, for all commodities, they must equal the total of values of those commodities. The cost price of commodities, k, is c + v, and the price of production is k + p. But, p, the average profit, is only the total surplus value divided proportionally across all the different capitals, and so the total of prices of production is just as equally c + v + s, and is the total of values.

On the one hand, if all of the different capitals are aggregated together, an average composition of capital is thereby determined. Those capitals that have a higher than average composition will then have progressively higher prices of production, relative to their exchange-value. Those that have below average compositions will have a progressively lower price of production relative to their exchange-values. Overall, the two cancel out. But, as Marx sets out, a secondary factor is also at work. Just as the variations in individual organic compositions is subsumed in the composite organic composition of the total social capital, so the same thing applies in relation to the variations in the rate of of turnover of individual capitals. If the total social capital is considered, a single composite rate of turnover is obtained, within which all of these individual variations are subsumed.

In just the same way as with the variations in the organic composition, therefore, variations of each individual capital's rate of turnover, compared to the average, will also thereby modify their prices of production. Those capitals which have a higher than average rate of turnover will have progressively lower prices of production, relative to their value, and vice versa.

These two effects may then counteract or reinforce each other. A capital with a higher than average organic composition, and lower than average rate of turnover, e.g. a shipbuilder, will have a price of production higher than the value of its output, on both counts. A capital that has a higher than average organic composition and higher than average rate of turnover will have a higher price of production than value on the first count, but lower price of production than value on the second count. For example, a very high-tech company may employ robots that process large amounts of material, using little labour. Because little labour is employed, only a small amount of surplus value is produced, and the value of output is thereby lower. In order to obtain the average rate of profit, the price of production for such a capital is higher than the value of its output. However, because the firm is highly productive, large amounts of material are processed quickly. Only a relatively small amount of capital is thereby advanced as circulating capital.

The firm might produce, for example, ball-bearings, thousands of which are turned out and sold each week, so that the advanced capital quickly returns. The shipbuilder might have to wait five years before the capital they have advanced returns. In that five year period, both firms may have laid out the same amount of capital, but because the ball-bearing producer turns over their capital each week, the amount of capital they advance will be only a small fraction of that advanced by the shipbuilder.

The average profit is calculated on the advanced capital, and, so, because the capital advanced is much smaller, for the ball-bearing producer, the amount of profit is correspondingly smaller than for the shipbuilder. But, this mass of profit, when then spread across the total laid-out capital, necessitates that although both capitals obtain the same average rate of profit on their advanced capital, the profit margin/rate of profit for the ball-bearing producer is a small fraction of that of the shipbuilder, with a consequent effect on their respective prices of production.

In a similar manner, these variations affect the social capital, in one country, compared to another, and the same country, over time. A more developed economy, with a higher than average organic composition of capital, will sell its output, internationally, on average, at prices of production higher than exchange-values, whereas a less developed economy, with a low organic composition of its social capital will sell at prices of production lower than values. Equally, as every economy becomes more productive, as it employs more and better machines, and continually improves transport and communications, so the rate of turnover of its social capital rises. Whilst this leads to a rise in the annual rate of profit, the processes discussed, which lead to an average rate of profit, equalise it with other economies, and so leads to lower average rates of profit, and profit margins.

The mechanism here is quite simply that a more developed, more productive economy increases the rate of turnover of its capital, and thereby raises the annual rate of profit within the economy. Some of this is due to the availability of higher specification equipment, some to better infrastructure, that speeds up the circulation period of capital. Foreign capital then migrates to this country in search of these higher annual rates of profit. As a consequence, the supply of commodities, in the economy rises, and so prices of commodities in the economy fall, until only the average global rate of profit is obtained. This is one reason that capital from developed economies tends to be invested in other developed economies rather than less developed economies, where wages may be lower, and profit margins higher, but where the average rate of profit is lower.

Back To Part 14

Forward To Part 16

Trump Backs British Fascists - Isolate Trump's Putrid Stench

Donald Trump has retweeted comments and videos from the Deputy Leader of Britain First, Jayda Fransen.  The fascist group, and other fascists across Europe have been quick to use Trump's backing to justify their vile ideology of hate.  It is not the first time that such things have happened.  Trump's backing for white supremacism, and racists in the US, has seen a similar thing by the KKK, and other racist and fascist organisations.  The assassin of British MP Jo Cox, was influenced by, if not actually a member of Britain First.  Trump cannot simply claim that he is just an ignorant oaf, who did not understand what he was retweeting.  He undoubtedly is an ignorant oaf, but he is an ignorant oaf who is also a racist, misogynist bigot and with whom these ideas sit comfortably.

Theresa May, having committed Britain to self-imposed isolation as a result of Brexit, was eager to enlist the support of Trump as soon as he was elected, in search of any patron, and source of scraps from the table.  May rushed to offer Trump a state visit to Britain.  Although the state visit idea has subsequently been dropped, Trump is still scheduled to make an official visit to Britain next year, at the Tories request.  Socialists should not call for a state ban on Trump's visit.  Calling for such state bans takes the responsibility for fighting fascists and other opponents of the labour movement out of the hands of workers themselves, and puts it into the hands of our enemies in the capitalist state.  That capitalist state will undoubtedly use such calls for state bans against us, to a far greater extent than they will be used against our enemies.

If the Tories want to continue with their offer to the vile Trump to come to Britain, let them do so.  It will reflect on them accordingly.  If Trump comes it should be the opportunity for the labour movement to mobilise on a scale never before seen, and an opportunity to mobilise a movement against everything that Trump, the Tories, and other reactionary nationalists stand for.  Trump definitely has fascist tendencies, but his government is not a fascist government.  On the contrary, the dominant elements within the US permanent state are hostile to Trump, a fact that Trump himself and his ideological backers like Bannon are all to well aware of.  Nevertheless, we should treat a visit by Trump, in exactly the same way as we would have done a Tory government in the 1930's inviting Hitler or Mussolini or Franco to Britain on an official visit.  We should deny Trump, as we would any of these other vile creatures any opportunity to spread their odious politics of hate.  Everywhere he goes we should erect a cordon sanitaire around him, drowning out the ignorant bigotry he promotes, with the ideas of working-class international solidarity.

Of course, a progressive social-democratic government in Britain would never offer any kind of official visit to Trump.  Yes, we should have relations with the United States, but a progressive social-democratic government in Britain should only be interested in offering such official visits to politicians in the United States of like mind.  At the present time a progressive Labour government in Britain should offer an official visit to Bernie Sanders, for example, in the same way that we should offer such visits to the leaders of Syriza, Podemos, and so on.  We do not seek to isolate the people of the US, or anywhere else, because the people in those countries are the forces we offer international solidarity with, to fight against our respective ruling classes.

In the 1930's, Trotsky warned against those who wanted to lend support for democratic imperialism against Hitler, because he said it would give Hitler a perfect opportunity to rally support around himself, against these external enemies.  He wrote,

"Naturally, not a single German worker wants this. To throw off Hitler by revolution is one thing; to strangle Germany by an imperialist war is quite another. The howling of the “pacifist” jackals of democratic imperialism is therefore the best accompaniment to Hitler’s speeches. “You see,” he says to the German people, “even socialists and Communists of all enemy countries support their army and their diplomacy; if you will not rally around me, your leader, you are threatened with doom!” Stalin, the lackey of democratic imperialism, and all the lackeys of Stalin – Jouhaux, Toledano, and Company – are the best aides in deceiving, lulling, and intimidating the German workers." (Phrases and Reality, in Writings 1938-9, p21)

Trump would undoubtedly use any proposals to impose sanctions on the US itself, as an opportunity to rally the same kind of reactionary nationalist sentiment in the US.  We should deny him that opportunity, even as Trump himself seeks to isolate the US, and to impose sanctions and trade limits on other countries.  We should reach out to those in the US, such as the supporters of Sanders, to build a movement that holds hands across the ocean against the reactionary nationalists, and we should build the same movement across Europe, and offer the same kind of solidarity to the workers of Central and Eastern Europe, and Russia who are confronted by the same kind of reactionary nationalism, and the attendant xenophobic and fascist ideas.

The fact, is that it is not the supporters of Trump who are in the ascendant in the US, but the supporters of Sanders.  That will increase even more as the lies of the Trump campaign and its connections with the reactionary nationalists in the Kremlin are increasingly exposed.  The same is true in Britain, not only are the lies of the reactionary nationalists being exposed as the Brexit negotiations are exposed but the nexus of connections between those reactionary nationalists with Trump, with the Kremlin, and with other reactionary nationalists in Turkey, Saudi Arabia, and Israel are also being exposed.

The fact that these connections can sometimes appear contradictory is nothing new.  The USSR had connections with Nazi Germany, for example, culminating in the Stalin-Hitler Pact; Zionists had connections with the German Nazis, and with the Italian Fascists.  As Wikipedia Wikipedia sets out in relation to the Lehi Group, also known as the Stern Gang.

"Lehi initially sought an alliance with Fascist Italy and Nazi Germany, offering to fight alongside them against the British in return for the transfer of all Jews from Nazi-occupied Europe to Palestine. Believing that Nazi Germany was a lesser enemy of the Jews than Britain, Lehi twice attempted to form an alliance with the Nazis. During World War II, it declared that it would establish a Jewish state based upon "nationalist and totalitarian principles". After Stern's death in 1942, the new leadership of Lehi began to move it towards support for Joseph Stalin's Soviet Union. In 1944, Lehi officially declared its support for National Bolshevism. It said that its National Bolshevism involved an amalgamation of left-wing and right-wing political elements – Stern said Lehi incorporated elements of both the left and the right – however this change was unpopular and Lehi began to lose support as a result."

The fact that the followers of such reactionary nationalist ideologies may seek to establish various alliances with others of the same ideology in other countries does not mean that they will not also seek to further their own nationalist strategic advantage.  Trump, for example, spreads his virulent brand of Islamophobia under cover of hostility to Islamic Terrorism, and yet has deepened his support for the Saudi regime, which is the biggest financier, and armourer of jihadism across the globe, and the promotion of Wahabbist ideology across the globe.  And, whilst Trump's supporters are virulent anti-semites, that does not prevent him from deepening his relations with the Zionist regime in Israel, or its growing connections with the Saudi regime.  That alliance is built solely on the grounds of trying to counter the growing regional strategic power of Iran, a growing power that arose directly out of the US war against Iraq, which dislodged the regime of Saddam, and also flows from the Saudi US backed operations of jihadists in Syria to try to topple Assad.

Our task is to present an alternative both to these reactionary nationalist regimes and forces, and to the conservative social-democracy that has held sway in much of the developed economies over the last 30 years.  It was the failure of that conservative social-democracy in terms of the Clinton dynasty in the US, of Blair in the UK, and of similar forces across the EU, which opened the door to the rise of reactionary nationalism in the shape of Trump, Farage, Bojo, Le Pen, Wilders and so on.  As Trotsky put it,

"Fascism is a form of despair in the petit-bourgeois masses, who carry away with them over the precipice a part of the proletariat as well. Despair as is known, takes hold when all roads of salvation are cut off. The triple bankruptcy of democracy, Social Democracy and the Comintern was the prerequisite for fascism. All three have tied their fate to the fate of imperialism. All three bring nothing to the masses but despair and by this assure the triumph of fascism." (Phrases and Reality, in Writings 1938-9, p19)

We have seen the potential for that in Greece, where the imposition of austerity by conservative politicians in the EU, and ECB undermined the Syriza government, and created the potential for a collapse into fascism, and has already led to a rise of the right-wing forces that presided over the creation of the Greek crisis in the first place.  In France, the failure of the Left to rally around a common progressive social-democratic programme, opened the door not only for Le Pen, but also for Macron, whose repetition of those same old, failed conservative politics opens the door even wider for Le Pen in four years time.

Now more than ever we need to reforge the idea of a Socialist International, not as some kind of talking shop where politicians gather every so often for a junket, but as an active international fighting organisation of the global working-class. 

Theories of Surplus Value, Part II, Chapter 10 - Part 14

Ricardo's examples do not demonstrate what he thinks he is proving. His first example sets out to show the effect of different degrees of durability of fixed capital on values. But, it cannot do this because he does not allow any of the value of fixed capital to enter the value of the end commodity as wear and tear. All the example shows is that where the length of turnover of capital is greater, more capital must be advanced than where the capital turns over faster. The annual rate of profit is thereby higher on the latter than the former, and so, given that the average rate of profit is calculated on the advanced capital, not the laid out capital, in order for both capitals to obtain the same average profit, the price of production for the former must be higher than for the latter.

Ricardo thinks his third example shows something different, but it is an identical example to the first. In his second example, Ricardo thinks he is showing the effect of different proportions of fixed capital to wages, but all he had shown is a comparison of the rate of profit on two capitals of different sizes. In other words, he confuses the rate of surplus value with the rate of profit. The rate of surplus value on two capitals, employing the same amount of labour power, may be identical, and so will both produce the same mass of surplus value. However, if one of these capitals also employs an amount of constant capital, and the other does not, the first will have a lower rate of profit, because the rate of profit is calculated on the total capital advanced not just the variable capital. Moreover, it makes no difference in this regard, whether that constant capital is fixed or circulating. But, in fact, the example shows the inadequate nature of the analysis which also flows from the inadequacy of Adam Smith's analysis, which omits the value of raw materials from the calculation of the commodity value.

[b) Ricardo’s Confusion of Cost-Prices with Value and the Contradictions in His Theory of Value Arising Therefrom. His Lack of Understanding of the Process of Equalisation of the Rate of Profit and of the Transformation of Values into Cost-Prices]

In drawing practical conclusions from his analysis, Ricardo slips into further errors flowing from his lack of understanding of the processes he is describing. He also falls into an uncharacteristic moral argument to explain different valuations that in part flows from the lack of any objective basis for the determination of his average rate of profit. So, he writes,

““The difference in value arises in both cases from the profits being accumulated as capital, and is only a just compensation” (as though it were a question of justice here) “for the time that the profits were withheld” (l.c., p. 35).” (p 189)

All this really says is that capitals of equal size will obtain the same average profit. But, capitals of equal size but different composition will produce different amounts of surplus value, so their price of production must differ from their value accordingly. Secondly, capitals of the same size and composition, but different rates of turnover will produce different annual rates of profit, and consequently, to obtain the same average annual rate of profit, the capital that turns over more slowly will require higher prices of production, and the capital that turns over faster, lower prices of production.

The further consequence of this is that the latter will have a lower profit margin, p/k, or rate of profit, s/c + v, and the former a higher profit margin. This is the fundamental driver of The Law of the Tendency for the Rate of Profit to Fall.

“Capitals of equal size produce commodities of unequal values and therefore yield unequal surplus-values or profits, because value is determined by labour-time, and the amount of labour-time realised by a capital does not depend on its absolute size but on the size of the variable capital, the capital laid out in wages.” (p 190)

This is actually badly worded by Marx. The capital that comprises £800 of materials and £100 of wages, with a 100 per cent rate of surplus value, will realise £1000 of value. And capital that comprises £200 of materials and £200 of wages will only realise the value of £600. What Marx really means is that the amount of surplus value, or surplus labour time realised depends on the size of the variable capital, if the rate of surplus value is constant.

“Even assuming that capitals of equal size produce equal values (although the inequality in the sphere of production usually coincides with that in the sphere of circulation), the period within which they appropriate equal quantities of unpaid labour and convert these into money, still varies in accordance with their turnover period. Thus arises a second difference in the values, surplus-values and profits which capitals of equal size must yield in different branches of production in a given period of time.” (p 190)

Back To Part 13

Forward To Part 15

Brexiters Irish Gambit Backfires

During the EU Referendum, a number of people, including me, pointed out that Brexit would pose serious problems in relation to Ireland and the border between Ireland and Northern Ireland. Leave campaigners, including hard-line leavers such as the then Northern Ireland Secretary, Theresa Villiers, said that no such problem existed that there had been a common travel area long before either Britain or Ireland had been in the EU (this latter fact, of both not being in the EU, is of course, where the difference and the problem now resides, but which the Leavers seem not to have understood, or pretend to not understand), and the media were happy to simply accept such assurances as good coin, particularly as they preferred to concentrate on the spats between different Tory celebrities on either side of the referendum, than to examine, in detail, the actual issues involved. Well, the Irish border clearly now is an issue, and it is the issue that some of us, always said it was!

Even in recent weeks, the Tories, and the Tory media have tried to downplay the actual issue of the border. It was much easier for the Tories, and the Tory media to talk in simple, and naive terms about the real issue in the Brexit negotiations all being about money, about the EU trying to get their pound of flesh from Britain, as a cost of going forward into the second stage negotiations. And, of course, that played into the Brexiters narrative that well, this just shows how much the EU needs the UK to plug the gaps in EU finances, and how desperate they will be to do a good deal with the UK for trade. It was, of course, obvious nonsense. The EU is a $14 trillion economy, as against the $2 trillion UK economy. When it comes to financing its budget requirements, or when it comes to a question of who needs who, it is quite clear that the UK needs the EU far more than the EU needs the UK.

But, the real issue never was the money, as I set out several weeks ago. I pointed out there that for Theresa May there was a political problem in getting her party to go along with a larger Brexit divorce bill, and with making concessions over the ECJ as regards Citizens Rights, but, essentially, provided she could create a sufficient coalition behind such concessions it was technically easy to resolve. A Brexit Bill of €50 billion over five years is not devastating to Britain, and is only probably about what it owes, and has committed to whilst being a member. Nor is making the necessary concessions over EU Citizens Rights anything that causes problems for Britain to agree to. By contrast, everyone in the Tory Party says they want there to be no border between Northern Ireland and the Irish Republic. Not only that but Labour say that too, as do the Liberals, the SNP, the DUP, Sinn Fein, the SDLP, the Irish government, and the EU! In practice, I suspect that there are some in the DUP, and probably in the Tory Party itself, and certainly within the ranks of dissident Republicans and Loyalists who would not be unhappy about a return of the border, and the return to the sectarian struggles of the past, before the Good Friday Agreement.

There are undoubtedly Loyalists who see direct rule by Britain as the next best thing to a Loyalist parliament in Stormont, and they undoubtedly have like minded supporters in the Tory Party. Indeed, there have always been Labour MP's that have cultural and family ties to the Loyalist community in Northern Ireland. Brexit fits naturally with such a reactionary nationalist, and Loyalist mentality, and a return of sectarian conflict would be just an excuse for a return to such Loyalist supremacism in the North of Ireland, backed up by a redeployment of British troops to the streets of Northern Ireland, to “keep the peace”, as a natural conclusion of the colonial delusions of such reactionaries.

Such reactionaries are a small minority, even within the Tory Party, but the problem is that whilst the idea of “no border”, is, therefore, politically easy to obtain verbal support for, it is impossible to achieve technically given the conditions that Theresa May, has allowed the hard line Brexiters to impose on her from the beginning. The hard line Brexiters like Bojo, Fox and Davis always believed that just by threatening to leave the EU, they would get the EU to offer up concessions, in the same way that Thatcher had won the rebate, and that Blair had succeeded in getting the opt-outs from the Social Chapter, and Brown had got (through Blair) the opt out of the UK from joining the Eurozone. Bojo had even talked about having two referenda, a second one after the EU had been forced to make such concessions. In effect what this amounted to, was Britain having cake and eating it, once more, of having all the benefits of being in the EU, whilst opting out of all of those aspects of it that were detrimental to the Tory agenda. That is still, in fact, the delusion that guides the negotiating stance, such as it is, of the Brexiters.

Because the Brexiters live in this delusional world, in which Britain is still some significant global colonial power, they continue to delude themselves that the EU needs Britain to cover its budget, that the EU needs Britain for its trade and so on. At each stage, they have had that delusion exposed, but, at each stage, they simply go further into the rabbit hole. The gambit of the Brexiters over Ireland was to use it as a Trojan Horse. They saw no problem in agreeing to the two-stage negotiating process, because they thought that the EU would compromise over the budget etc., and they believed that when it came to it, they would be able to say to the EU that resolving the border question depends upon agreeing Britain's future trading arrangements with the EU. In other words, just as they have used the 4 million EU citizens living in Britain as a bargaining chip, during the stage 1 negotiations so they would hold the people of Ireland, and the continuation of the peace process to ransom, in order to get a trade deal with the EU.

For the reactionary nationalists, the logical conclusion of this process, is that the progressive demolition of borders within Europe, which enables the coming together of workers across the continent to pursue their common interests, is reversed, and borders once more are established, dividing workers once more on national and ethnic grounds. A good example of that, was the comment of Kate Hoey, yesterday, on The Daily Politics where she ridiculously predicted that Brexit would also lead to people in the Irish Republic also voting to leave the EU. The extent of such reactionary delusions is shown by the fact that not only did the people of Northern Ireland vote overwhelmingly against leaving the EU, but support for the EU in the Republic stands at around 80%!

The hard line Brexiters, and their supporters in the Kremlin and the White House, obviously thought that they were on a roll, as first Brexit was voted through, then Trump won in the US, and it looked like other reactionary populist elements such as Le Pen, Wilders and so on, were in the ascendant. Hoey's delusion that Brexit might spread via Northern Ireland into the Republic, is simply a manifestation of this global vision, of this strand of reactionary nationalism. But, the delusion has also been exposed in the reaction to it. The real momentum in the US does not reside with Trump supporters, but with Sanders supporters, just as the momentum in Britain does not reside with Nigel Farage, but with Jeremy Corbyn. Its only a question of time, before similar forces emerge in Europe, as they already have with Podemos, and Syriza, and the Left Bloc in Portugal, that supplant the conservative forces such as Macron, and so on, and provide a radical social-democratic alternative to reactionary nationalism.

But, the issue of the Irish border cannot act as a Trojan Horse for the Brexiters given that they have already created the conditions in which that is impossible. The Brexiters argue that resolving the issue of the border requires settlement of Britain's future trading arrangements with the EU. Well yes, that would be fine, if those discussions about those future trading relations were going to be about Britain remaining in the single market and customs union, and the terms for doing so, but Theresa May, under pressure from the hard Brexit wing of her party, has already set ,as “red lines”, the starting point that Britain is going to be outside both the Customs Union and the Single Market. In which case, the only thing in those trade negotiations that could have provided a solution to the Irish border, has already been rejected by the Tories!!!

The only way that could work is if the EU were to say to Britain, you do not need to be in the Single Market, you do not have to be in the Customs Union, you do not have to accept the jurisdiction of the ECJ, you do not have to accept any of the four freedoms of free movement of people, goods, services and capital, but you can continue to trade with the EU in the same way you do now! There is absolutely no way the EU, or any other similar institution would agree to such an arrangement, and it is the delusion of the Brexiters that anyone would.

The Brexiters might say that a free trade deal, such as Canada's free trade deal with the EU allows third countries to trade without tariffs, and without Canada being inside the EU Customs Union, or Single Market, but that is not at all the same thing. First of all, Canada does not have a border with the EU, and no one is suggesting that EU citizens can move freely to Canada or vice versa, which would be the case with no border in Ireland. Nor does free trade mean that goods and services may not be subject to other limitations, which in the current global economy are more important, such as commitment to common standards, and so on. Canadian goods will not come into the EU unchecked, and vice versa, and that means that even with a free trade agreement, trade is not frictionless across borders, and that is true in the EU, where borders exist with non-EU countries, such as Norway, where such free trade agreements exist.

The Brexiters thought they would be able to hold the people of Ireland to ransom, as a means of forcing the EU to go into stage 2 talks without Britain resolving the question of how there could be no border in Ireland. They thought it would force the EU to have to provide Britain with open access to the customs union without being a member of it. They thought that Ireland would support that gambit because much of Ireland's trade is into the North, and into Britain. They thought wrong.

If a border is reintroduced in Ireland, a lot of the investment that has gone into the North will migrate South as, especially foreign, investors worry about a return of instability and violence in the North. A lot of exports from the Republic to Britain passes through the North, often having passed back and forth across the border several times first. It will be likely that this cross border trade will be reduced considerably, and that finished products will be exported directly out of the Republic to Britain. Moreover, as an increasing amount of value creation now, is in services, and as the republic has developed a lot of its economy on the basis of high-tech industries, the question of physical transportation becomes less relevant, as does distance. The Republic can export a lot of high value, high-tech production, by the Internet, and the same is true for a lot of high value service industries, for example, in finance etc. Moreover, although the UK currently represents a large part of the Republic's trade, that can quickly change as Britain exits the EU, especially as the UK economy is in relative decline, and the EU is currently growing rapidly once more.

The Brexiters now have a couple of weeks to come up with a solution to a problem they have created for themselves, and to which there is no solution, within the red lines that Theresa May has set down. As the Irish government has said, and as I have said in the past, the reality rather than the Brexiters delusion is that if you want there to be no border in Ireland, then either Britain as a whole, or Northern Ireland on its own, has to remain in the Customs Union. Labour at least has left that option open, and so it could legitimately argue a real solution could only be concluded under the second stage negotiations. But, in reality, Theresa May could never have put forward such a compromise, because it would have blown the Tory Party apart. Moreover, in reality, Labour's stance makes no real sense either, as I have set out previously.

Yes, it makes sense if you want to avoid all of these problems such as the Irish border – and the same is true of the border between Spain and Gibraltar – and all of the other problems that arise as a result of being outside the Customs Union and Single Market, but then the question arises, if you are going to be still inside all of those institutions, still bond by their rules, still have to contribute to the budget and so on, why would you do that, whilst denying yourself, the right to vote on the formulation of all those rules and so on, by remaining a member of the EU and its political forums itself! The reality has always been that there is only a choice between hard Brexit and no Brexit. The reality is simply imposing itself over the delusion.

Theories of Surplus Value, Part II, Chapter 10 - Part 13

Another way of calculating the average rate of profit, here, would be as follows. The farmer turns over their advanced capital of £400 once in the year, but the cotton goods producer turns over their advanced capital only 0.5 times, because they do not sell their output until the end of year two. Using the formula developed by Engels in Capital III, therefore, the rate of profit is the surplus value produced in one turnover period multiplied by the number of turnovers, divided by the total advanced capital. The total advanced capital in the first year is £800. The farmer's capital turns over once, and the cotton goods producer 0.5 times, giving an average rate of turnover of 0.75 times. So, total surplus value is £200 × 0.75 = £150. The rate of profit on the advanced capital of £800 is then 18.75 per cent. The farmer would sell their output for £475. The cotton goods manufacturer would then carry forward a machine with a value of £475 as constant capital, which is advanced in the second year, along with an additional £400 in wages. In year two, therefore, the total advanced capital is £400 by the farmer, and £475 + £400 = £875 by the cotton goods producer = £1275 in total. All of the capital advanced, in year two, is turned over, and the surplus value produced is £200. The rate of profit is then 15.69%. The farmer would then sell their output at £400 + 15.69% = £462.76. The cotton goods producer would sell their output at £875 + 15.69% = £1012.29.

The other option is that both advance £400, and it's taken that both turnover in the year. Then the rate of profit for both in year one is 25 per cent. The Farmer sells their output at £500, and the cotton producer, sells the machine to themselves for £500. Then, in year two, the Farmer advances £400, and the cotton producer £500 + £400 = £900. So, total advanced capital is £1300, and rate of profit is £200/£1300 = 15.38 per cent. Then the farmers sell their output for £461.52, whilst the cotton goods producer sells there is for £1038.42. 

“But it is incorrect to say, as Ricardo does, that here a variation in the relative values takes place “on account of the different degrees of durability of capitals” (p. 30) or “on account of the time which must elapse before one set of commodities can be brought to market” (p. 30). It is, rather, the adoption of a general rate of profit, which despite the different values brought about by the circulation process, gives rise to equal cost-prices which are different from values, for values are determined only by labour-time.” (p 187)

The important point here is that the farmer has their profit available at the end of the first year, as well as their advanced capital. Not only can they advance their capital once more, without advancing additional capital, and so can generate surplus value on the same advanced capital, but they can also accumulate the realised profit. The cotton goods producer, must advance an additional £400 of capital, and does not realise it and the initial £400 until the end of year two, and does not have the realised profit until that time. Capitals engaged in such production would thereby require higher prices of production, so as to equalise real rates of profit.

Marx indicates that the method of calculating the rate of profit as though the cotton goods producer had sold the machine to himself is not valid. Firstly, he does not realise any profit by selling his own output to himself. Unlike the farmer he would have to advance an additional sum simply to cover his own subsistence. Secondly, there can be no equalisation of profits that have not been realised, and so equal zero.

“Incidentally, whether in the second case a compensation can take place and profits can be equalised depends here entirely on the degree to which the profits of the capitals which are turned over in one year are recapitalised, in other words, on the actual amount of profits produced. Where there is nothing, there is nothing to equalise. Here the capitals again produce values, hence surplus-values, hence profits not in proportion to the size of the capital; If profits are to be proportionate to their size, then there must be cost-prices different from the values.” (P 188)

Ricardo gives a third example which he says is different in appearance, but the same in fact.

““Suppose I employ twenty men at an expense of £1,000 for a year in the production of a commodity, and at the end of the year I employ twenty men again for another year, at a further expense of £1,000 in finishing or perfecting the same commodity, and that I bring it to market at the end of two years, if profits be 10 per cent, my commodity must sell for £2,310; for I have employed £1,000 capital for one year, and £2,100 capital for one year more. Another man employs precisely the same quantity of labour, but he employs it all in the first year; he employs forty men at an expense of £2,000, and at the end of the first year he sells it with 10 per cent profit, or for £2,200. Here then are two commodities having precisely the same quantity of labour bestowed on them, one of which sells for £2,310—the other for £2,200. This case appears to differ from the last, but is, in fact, the same” (l.c., pp. 34-35).” (p 188)

This is not just the same in fact, but also in appearance, Marx says, “except that in the one case the commodity is called “machine” and here simply “commodity”.” (p 188). In both cases, it comes down to the fact that one of the producers lays out, in the second year, the whole of the first years product including surplus value, plus an additional capital. In both cases, the real basis of the variation in prices is due to variations in the rate of turnover, and its effect on the average rate of profit, and price of production. But it is because the price is based upon this price of production, as the cost price plus average profit, that the prices differ not because of the variation in values.

“The clumsiness of these examples shows that Ricardo is wrestling with a difficulty which he does not understand and succeeds even less in overcoming.” (p 189)

Back To Part 12

Forward To Part 14

Theories of Surplus Value, Part II, Chapter 10 - Part 12

Marx then dissects Ricardo's example further, by taking a step backwards within it, and introducing actual amounts of surplus value. Ricardo does not deal with the issue of surplus value, because he does not recognise it as a category separate from profit, rent or interest. He simply assumes its existence, and imposes an arbitrary rate of profit. He must do so, because he has no theory for determining what profit is, or why it should be some specific amount.

Marx introduces a rate of surplus value of 25 per cent, so that, of the £500 value of the corn and the machine, £400 reproduces wages, and £100 is surplus value. He then assumes that the whole of the value of the machine is used up in wear and tear in the production of cotton goods in the second year.

“In fact Ricardo assumes this, in that, at the end of the second year, he compares not only the value of the cotton goods, but “the value of the cotton goods and the machine” with “the value of the corn ”[l.c., p. 29].” (p 184 – 5)

The value of cotton goods is then £1000 (£500 machine + £500 added labour), and the value of the corn is £500. This is all consistent with the law of value. Both producers obtain 25 per cent of profit – £100 each in year one and two. The difference here is that the farmer realises the £100 profit at the end of year one, but the cotton goods producer does not realise the £100 profit from the machine until the end of year two, when they sell their cotton goods. But, in reality, the cotton goods producer will sell their output at the end of the second year, not for its value of £1000, but for a price higher than this. Ricardo puts this down to the proportion of fixed capital to wages, and the durability of the fixed capital, but, as shown earlier, the real reason here is the consequence of different rates of turnover of capital. In other words, the farmer turns over all their capital in the year, whilst the cotton goods maker only turns over the capital advanced for the machine after two years. The cotton goods producer, Marx says, calculates like this.

“... the first year I laid out £400 and by exploiting the workers, I produced a machine with this, which is worth £500. I thus made a profit of 25 per cent. The second year I laid out £900, namely, £500 in the said machine and again £400 in labour. If I am again to make 25 per cent, I must sell the cotton at £1,125, i.e., £125 above its value. For this £125 does not represent any labour contained in the cotton, neither labour accumulated in the first year nor labour added in the second.” (p 186)

And, if the cotton goods producer sells above value, and there are only these two participants, that means the farmer must exchange their output below its value. But, in that case, the farmer could not make 25 per cent profit. It would mean they were cheated by the cotton goods producer. If both are to obtain the same rate of profit, it must be less than 25 per cent. The average rate of profit, over the two years could be calculated as follows. The farmer advances capital of £400 which turns over twice during the two years, whereas the cotton goods producer advances a total of £800, which turns over once in that time. The total advanced capital is then £1200 and the total surplus value is £400. That gives an average rate of profit, over two years of 33.3 per cent.

In that case, the cost price for the cotton goods producer is £800 and their profit is £266.66, giving a selling price of £1066.66, and the cost price of the farmer is £400, giving a selling price of £800 + £133.33 equals £933.33. The total value of output is £2000, and the total prices of production here are also £2000. Put another way, the farmer, here, would have laid out capital of £400 in year one, and produced output with a value of £500, but would sell it at a price of production of £400 + £66.66 = £466.66. They would do the same in year two. Over the two years, the farmer would sell their output at prices of production £66.66 below value, whereas the cotton goods producer sells their output at a price £66.66 above value.

This is a different conclusion to that arrived at by Marx, which assumes the same amount of capital advanced by both the farmer and the cotton manufacturer. It is also a different result to that arrived at by the editors of the Lawrence and Wishart edition – note 71. They correct for the different sizes of capital, but do not account for the different rates of turnover of capital, and so calculated on the basis of the laid out rather than advanced capital.

Back To Part 11

Forward To Part 13

Tory Short-termism

The British ruling class is renowned for being short-termist. The Tories are emblematic of it.

The landed aristocracy, knowing that any improvements that capitalist farmers introduced to the land, would be appropriated by them as soon as existing leases ran out, increasingly sought to turn all leases into short term rentals. The consequence was that capitalist farmers were thereby dissuaded from making improvements, and investing  capital in the land, which would have raised output and productivity.

In the early 19th century, when machine industry, driven by the introduction of large numbers of steam engines, replaced handicraft production, the huge expansion of production drew in millions of workers from the countryside into squalid conditions in the towns and cities, but the incentive for the individual capitalist owners, driven by competition, to make the most intensive and extensive use of these machines, drove them to work their labourers for excessive amounts of time. The workers were, in fact, their most valuable resource, the basis for the creation of new  value, and of their profits . But, the employers, seeing what they thought was an inexhaustible supply of this  labour-power, paid it no heed. Only when that supply of labour-power started to be exhausted, did the employers begin to realise the need to put some kind of regulation on their competition, and abuse of that resource. Even then, it was the action of workers through their Trades Unions, and the representations of the officials of the capitalist state, such as Leonard Horner, and other Factory Inspectors that provided the main drive that forced the individual employers to set aside their individual interests, in favour of the general interest of their class.

Some of the penny-pinching measures taken by these individual employers, during this early period, did not even make any sense. For example, Marx relates one Inspectors' Report which showed that firms were failing to put guards on machines that cost just a few pence, but which would save them pounds in lost production due to injuries to the machine operators. Only when new machines were introduced, which had the guard already built in, did that problem get resolved.

When it comes to shareholders, the problem of short-termism is again apparent. Andy Haldane, the Chief Economist at the Bank of England, has talked about capitalism eating itself, as the representatives of shareholders on company boards have pushed up the proportion of profits taken as dividends from around 10% in the 1970's, to around 70% today. Hillary Clinton, a couple of years ago, discussed the same problem in the US, which she called, Quarterly Capitalism, as these same executives representing the interests of shareholders, prioritise pushing up the share price, the payment of dividends, etc. over investment in, and the future growth of the company.

Shareholders have little interest in taking a long-term view, particularly when they are nowadays more concerned with the potential for making short term, capital gains, from rising share prices than obtaining a  revenue stream from the shares they own. The most obvious example of that is high frequency trading, whereby machines buy and sell billions of shares in a fraction of a second, making money, from even the smallest variation in the share price of companies. But, in general, when the owners of loanable money-capital can move that  money more or less instantaneously from the shares of one company to those of another anywhere in the world, or can move their money from shares to bonds, and so on, even less is their any requirement for them to have any affinity to any particular company, or country, or its long term development.

The Tories are the political representative of all these groups – the owners of landed property, the owners of loanable money-capital, and the remnants of that class of private industrial capitalists, that linger on in the shape of the small an medium sized private firms. It is no wonder then that the Tories themselves have a short term view, one consequence of which was Cameron's disastrous gamble on the EU Referendum, as a means of trying merely to deal with internal Tory party squabbles. The Tories are led to adopt these short term perspectives consistent with the ideas of the class fractions they represent, as opposed to the interest of the dominant form of capital –  socialised capital – which requires by contrast a long term perspective. Like all bourgeois parties, of course, the Tories are also led to adopt a short-termist perspective, in order to try to win votes, as has just been seen in the Budget, and as was seen in the previous Budget, when Hammond was forced to drop his plans for National Insurance for the self-employed, when it provoked a backlash amongst that particular fraction of Tory voters.

Two different stories in the last week caught my attention, in this context. Hammond made a big thing about proposals for introducing self-driving cars on to Britain's roads by 2021. In fact, as with all new innovations, the real drive to introduce self-driving vehicles will be to reduce the costs for capital. Steam engines were first used to replace water and wind-power, and to replace horses for traction, and only later were used to provide a range of consumption goods, such as passenger trains, and so on. Electric motors first powered sewing machines etc. in factories, before they were used in a range of consumer electronics, and the same is true of the petrol engine. Similarly, the major use of self-driving vehicles – as already on the railways – will be to introduce self-driving trucks, as well as to replace taxi drivers, and van drivers. Self driving electric cars will only become commonplace after that industrial use has been well established. But, for that to happen, the government needs to spend a lot of money on infrastructure for charging points and so on. Even so, I expect the development to be rapid, and we are likely to see electric cars replace petrol cars fairly quickly, and for self-driving electric cars to become commonplace, much more quickly than was the spread of petrol engine cars, during the last century.

Thinking now about the introduction of self-driving electric cars, and the infrastructure requirements that entails is a good start on having a more long-term perspective. But, the other story from last week that makes me question that was a story that the new West Midlands Metropolitan Mayor had supported funds going to Dudley for the creation of a new tram system. But, if you envisage driverless electric cars being on the road by 2021, as Hammond has said, why waste million of pounds on electric trams?

The reason that trams disappeared in the first place, was that like trains, they may be very good at going from A to B, but they are useless at going to anywhere even a few hundred yards either side of the train line between the two. Petrol driven buses were able to overcome that problem, by not being constrained by the need to run on fixed rails, and being able to utilise existing roads. The same is true of cars, which extended that flexibility even further allowing the car owner to take whatever route they chose to best meet their needs. A bus is all very well if its route takes you on the various stops you might need to make, but the practicality of someone going to work in a morning, who needs to take the kids to school in the process, and may need to make a number of other stops, is not at all suited to fixed bus routes, especially as those routes get reduced, and the connections of buses on different routes do not exist without long waits.

Why waste money on trams, when instead the money would be better spent laying down the infrastructure required for self driving electric cars, which as with an Uber, you could simply call up as and when you wanted it, and have it go anywhere, you wanted, by whatever route you wanted, simply by telling it, where to go, and then when you have reached your destination, simply forget about it?

And, of course, the same applies with that other white elephant HS2. HS2 is useless for more effectively transporting freight around the country, and when it comes to transporting passengers, it is again largely pointless. As with a tram, it is fine if you want to go from Manchester to London, which is its real intention, thereby to bring additional workers in to feed the insatiable appetite of the capital for labour-power, and thereby to bring in cheaper labour-power from the North. But, if you want to go ten miles either side of the HS2 route it is as useful as a chocolate teapot. Without large scale investment in East-West transport links, all that will result is congestion along the route of HS2, and there is no sign that the required investment in East-West transport links will be undertaken.

If the government wanted to adopt a more strategic long-term view, then instead of HS2, it would have put much more resources into the development of truly high-speed broadband at least equal to the 1GBPS speeds in Singapore. That is especially the case given that its in services that 80% of the economy now resides.

In the last few months I have had occasion to drive on the M6 to Manchester and Liverpool, and again the consequence of the government's short-termism is apparent. The Tories are fond of talking about mending the roof when the sun is shining, but the truth is that wherever you look in relation to the country's infrastructure, they most certainly have not spent money mending the roof, or the doors and windows, or the roads or anything else whilst the sun of 300 year record low  interest rates have shone on them! Instead they have simply used those low rates to blow up enormous asset price bubbles in property, and stock and bond markets. The roads and motorways were neglected for decades, and now the widening of the M6 drags on year after year, causing traffic to crawl along it at a snail's pace.

If you want an explanation for Britain's stagnant productivity, the queues of static lorries along the M6 are emblematic of it, and with Brexit those queues of lorries will not just extend along the motorways, but back for miles from the ports and airports.

Theories of Surplus Value, Part II, Chapter 10 - Part 11

Marx dissects Ricardo's theory and begins by setting out all of the assumptions implied within it. Those include the assumption that nothing is spent on raw material; the farmers spends nothing for instruments of labour, and that the cloth maker and cotton goods producer have no value of wear and tear transferred from their machines to their output. Marx compares the situation between the farmer and cotton goods producer, because the inclusion of the cloth maker adds nothing to the analysis. He begins from the end. So, in the second year, the farmer lays out £5000 in wages, whilst the cotton goods producer advances £5500 in the machine and £5000 for wages.

If both make 10 per cent, the farmer sells his output for £5500, and the cotton goods producer his output for £6050.

“One absolutely cannot conceive what Ricardo intended to elucidate in this example, apart from the fact that the cost-prices of commodities—in so far as they are determined by the value of the outlay embodied in the commodities plus the same annual rate of profit—differ from the values of the commodities and that this difference arises because the commodities are sold at prices that will yield the same rate of profit on the capital advanced; in short, that this difference between cost-prices and values is identical with a general rate of profit.” (p 182)

As Marx says, the introduction of the question of fixed capital in the example is meaningless, because if the cotton goods producer had used an additional £5000 of circulating capital, in the shape of raw materials, the outcome would be exactly the same. To say, as Ricardo does, that they employed different quantities of "accumulated labour" is correct, although Ricardo equates this with fixed capital, as he has no category of constant capital.

“However, the fact that they employ “different quantities of accumulated labour” only means that they lay out “different quantities of capital” in their respective trades, that the amount of profit is proportionate to this difference in the size of the capitals they employ, because the same rate of profit is assumed, and that, finally, this difference in the amount of profit, proportionate to the size of the capitals, is expressed, represented, in the respective cost-prices of the commodities.” (p 183)

But, having recognized that they employed different quantities of accumulated labour, Ricardo fails to connect this to the price of production of the commodity, focusing solely on the amount of living labour, i.e. the amount paid out in wages, in determining the value of the commodity. The reason for this is quite simple. Ricardo has no concept of surplus value, and so cannot connect the fact that the surplus value is a product only of the variable capital, whereas the value of the commodity and the rate of profit are calculated on the basis of the total capital.

For Ricardo, the value of the commodity is nothing more than the value of the "accumulated labour" plus the wages plus an amount of average profit. But, this average rate of profit is itself merely an arbitrary figure that Ricardo simply presupposes to exist, without any enquiry as to its origin, or thought as to why it might be 10 per cent, rather than 20 per cent, or 100% or any other figure.

“This means that they do not employ the same quantity of labour—immediate and accumulated labour taken together—but they do employ the same quantity of variable capital, capital laid out in wages, the same quantity of living labour. And since money exchanges for accumulated labour, i.e., existing commodities, in the form of machines etc., only according to the law of commodities, since surplus-value comes into being only as the result of the appropriation without payment of a part of the living labour employed—it is clear (since, according to the assumption, no part of the machinery enters into the commodity as wear and tear) that both can only make the same profit if profit and surplus-value are identical.” (p 183)

But, it's clear that the surplus value and the profit could not be identical. Both capitals employed the same amount of variable capital, and thereby produce equal amounts of surplus value, but the cotton goods producer employs a further £5500 of capital in the shape of the machine, and they expect the average rate of profit on this machine too. It would require that the cotton goods producer sell their output at £5500, the same as the farmer, for them both to obtain the same rate of profit calculated only on their variable capital, and so equal only to the rate of surplus value, not the rate of profit. But, no capitalist would, as in this case, layout twice as much capital only to obtain the same amount, and so half the rate of profit.

If the cotton goods producer sold all of their output £5500 of machine + £5500 of cotton goods, they would obtain only £11,000, which would be a rate of profit of only five per cent per annum, while the farmer makes 10 per cent. If both the farmer and the cotton goods producer make 10 per cent profit then their commodities cannot sell at their exchange-value. If the latter arbitrarily adds an additional five per cent of profit to their price then both sets of commodities would sell at prices above their value, unless the surplus value made by the farmer is actually 15 per cent, so that, in selling at only 10 per cent profit, they sell at a price that is below the value. In that case, it would mean that taken together the commodities of the farmer and the cotton goods producer sell at prices equal to their total value. But, one sells at prices above value, by an equal amount to which the other sells at prices below value. From that perspective, Marx says, Ricardo's example hits upon the correct position, although Ricardo does not recognise it.

“Here, in Ricardo’s above proposition, when correctly modified, lies the truth, [namely] that capitals of equal size, containing [different] proportions of variable to constant capital, must result in commodities of unequal values and thus yield different profit; the levelling out of these profits must therefore result in cost-prices which differ from the values of the commodities.” (p 184)

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Theories of Surplus Value, Part II, Chapter 10 - Part 10

According to Ricardo, it comes down to the changes in wages, and the varying effects of those changes dependent upon the different proportions of labour to fixed capital, the durability of the fixed capital and rate of turnover. However, as Marx points out, a change in wages can have no affect on the value, or exchange value of the commodity. Its effect is only on the profit. If we take the two capitals discussed earlier of 1000, where one consists of 800 c and 200 v, whilst the other comprises 200 c and 800 v, then, if the rate of surplus value is 20 per cent, the first produces £40 of profit, and the latter £160 of profit. Total profit is £200 on a total capital of £2000, giving an average rate of profit of 10 per cent. If they sold at prices of production, they would both sell their output for £1100. Suppose their wages rose by 20 per cent. In his example, Marx assumes that the value of constant capital remains constant. In that case, the wage bill of the first capital rises by £40, so that if they still sell their output at £1100, their profit falls from £100 to £60. The profit of £60 on the capital laid out of £1040, giving a rate of profit of 5.77 per cent. For the second capital, their wage bill rises by £160, which means they then make a loss of £60.

“This, however, is only the case because the average profit has already modified the relation between the labour he has laid out and the surplus-value which he himself produces.” (p 179 – 80)

The correct calculation would have been, first to work out the total profit, and the average rate of profit. So, the total profit would have fallen by £100 as a result of the wage rise. The profit now of £100, on a total capital of £2100 gives the rate of profit of 4.76%. The first capital would sell its output at £1040 + 4.76%, whilst the second would sell its output at £1160 + 4.76%. Instead of analysing why the capitalist who lays out four times as much in wages as the other does not make four times as much profit, Ricardo focuses on the subsidiary issue of why, after the rate of profit is equalised, any change in the rate of profit, for example, due to a change in wages, affects the former capital more than the latter, in terms of their prices.

Ricardo says,

“Suppose two men employ one hundred men each for a year in the construction of two machines, and another man employs the same number of men in cultivating corn, each of the machines at the end of the year will be of the same value as the corn, for they will each be produced by the same quantity of labour. Suppose one of the owners of one of the machines to employ it, with the assistance of one hundred men, the following year in making cloth, and the owner of the other machine to employ his also, with the assistance likewise of one hundred men, in making cotton goods, while the farmer continues to employ one hundred men as before in the cultivation of corn. During the second year they will all have employed the same quantity of labour” (p 180)

But, Marx points out that although they will have paid out the same amount in wages, they will not at all have employed the same amount of labour. The capitalist who uses the machines produced in the first year, will thereby employ also this additional dead labour.

Ricardo goes on to recognise that the value of the cloth and cotton goods will be comprised of 200 hours of labour – 100 for the machines, and 100 in the production of these goods – but he says the actual value of these goods will be greater than this. If the corn has a value of £500 them the cloth and cotton goods should have a value of £1000, but it will, in fact, be more, “for the profit of the clothier’s and cotton manufacturer’s capital for the first year has been added to their capitals, while that of the farmer has been expended and enjoyed. On account then of the different degrees of durability of their capitals, or, which is the same thing, on account of the time which must elapse before one set of commodities can be brought to market, they will be valuable, not exactly in proportion to the quantity of labour bestowed on them,—they will not be as two to one, but something more, to compensate for the greater length of time which must elapse before the most valuable can be brought to market.” (p 180 – 1)

If wages are £50 per annum then each capital lays out £5000 per annum on wages. Ricardo assumes a rate of profit of 10 per cent. So, the value of the machines, he says, is £5500. The total capital employed, in the second year, for the cloth producer and cotton goods producer, is £5500 + £5000 = £10,500. So, Ricardo says, that means the profit for the second year, should be £1050 - £500, as in the first year, plus £550, as 10 per cent of £5500. He assumes they do not sell the machines, and that it does not transfer any value by wear and tear, and so assumes they sell the cloth and cotton goods at £5000 + of £1050 = £6050. But, that means that the prices here are prices of production – cost of production plus average profit – and these differ from the commodity values. Yet, Ricardo continues to argue that it is the values that differ and that this difference is a result of having varying amounts of fixed capital employed.

Marx points out that it is not at all the consequence of the employment of different amounts of fixed capital, but simply the consequence of each capital expecting to receive the same rate of profit. Had the cloth producer and the cotton goods producer employed an additional £5500 of labour, in the second year, rather than a machine, they would still have expected to obtain £1050 of profit on their advanced capital of £10,500.

Ricardo is wrong when he says,

““The cloth and cotton goods are of the same value, because they are the produce of equal quantities of labour, and equal quantities of fixed capital; but corn is not of the same value” “as these commodities, because it is produced, as far as regards fixed capital, under different circumstances” (l.c., p. 31).” (p 181)

What he should have said is that they have a different price of production, and that different price of production is a consequence of the same average rates of profit being applied to different amounts of capital.

“This exceedingly clumsy illustration of an exceedingly simple matter is so complicated in order to avoid saying simply: Since capitals of equal size, whatever the ratio of their organic components or their period of circulation, yield profits of equal size—which would be impossible if the commodities were sold at their values etc.—there exist cost-prices which differ from the values of commodities. And this is indeed implied in the concept of a general rate of profit.” (p 181)

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