Sunday, 25 February 2018

Its Not Inflation Driving Interest Rates Higher (6/10) - The Profits Squeeze and Interest Rates

The Profits Squeeze and Interest Rates 

As Sutcliffe writes, by the time he wrote his book, in 1983, there was, 

“overwhelming evidence to show that that the decline in profitability, though uneven between capitalist nations, is a worldwide phenomenon.” (p 39) 


“In every major capitalist country there has been a pronounced decline in profitability since 1960, in many cases accelerating over the last decade. Some studies suggest that the USA has been an exception, though the most recent ones show it following the international trend. The cut in the rate of profit has been particularly pronounced in Britain, Italy and West Germany. In the advanced capitalist countries as a whole the profit rate in commerce and industry halved in the fifteen years after 1960.” (p 43) 

That continued most notably in Britain and France throughout the 1970's, as they experienced a prolonged period of crisis and increasingly stagflation. Moreover, as Sutcliffe explains the reason for this fall in the rate of profit was not the so called law of the tendency for the rate of profit to fall, but that which he and Andrew Glyn had described, which is the fall in the rate of surplus value. 

“To revert to the terminology of Marx, it would seem that the rate of exploitation has been falling; and that the organic composition of capital has risen, but not so strikingly.” (p 44) 

Moreover, as Marx describes at length in Theories of Surplus Value, what appears as a rise in the organic composition, can, in fact, only be a rise in its value composition.  In other words, it may not be that the technical composition rises, as a consequence of higher productivity via technological change, but only that the higher demand for raw materials also causes their prices to rise.  So, its not that more material is processed by a given amount of labour, but only that the higher demand for material causes its price to rise, in a similar way to the higher demand for labour-power causes wages to rise.  Marx discusses this process in Capital III, Chapter 6, and the fact that it is a feature of the phases of the cycle where capital accumulation proceeds more rapidly, but on the basis of extensive rather than intensive accumulation.  He describes there, how these spikes in raw material prices can also lead to crises, as the end product cannot be sold at prices that reproduce these inflated material prices.

In their 1976 book, “Relative Income Shares”, John King and Philip Regan note that although Glyn and Sutcliffe's conclusions can be criticised because they focus on wages and profits rather than taking into consideration the portion of surplus value that went to rent and other “property income”, even on this latter basis, the wage share in Britain rose from 73.4% in 1955-59 (itself up from 72.1% in 1950-54) to 75.6% in 1969-73. Property income fell correspondingly from 26.6% to 24.4%.  I'll describe later why King and Regan's objection, is in any case, largely not valid.

But, this difference in the cause of falling profits, i.e. due to a fall in the rate of surplus value, as opposed to a rise in the organic composition of capital is important, not only because in relation to Marx's theory of crisis, the former represents the basic conditions leading to crises of overproduction, whilst the latter represents the means by which capital resolves those crises, but also in relation to interest rates. In Capital III, Marx sets out the basis of the interest rate cycle, as it, in turn, relates to the cycle of capitalism through periods of stagnation, prosperity, boom, crisis, and back to stagnation. In the period of stagnation, capital concentrates on intensive accumulation. The new technologies developed as a result of the period of crisis, and labour shortages, begin to be introduced to replace labour and the old technology, not as a means of rapidly expanding output. Indeed, its that fact that leads to the character of the period as one of stagnation; production increases slowly, but as a result of the new technology does so without the need to increase the workforce by the same proportions as would previously have been the case, so the demand for wage goods from workers does not rise, so much, and may even fall, as the small increase in employment may be offset by the fall in wages per worker. Moreover, the new technologies reduce the value of the existing fixed capital stock, via moral depreciation, and the sluggish demand for inputs causes the prices of raw materials to fall, as well as the new technologies making available new types of materials, and creating efficiencies in the way raw and auxiliary materials are used. 

The consequence is that, as wages are pushed down, the rate of surplus value rises. But, because proportionately less labour is now employed to produce a given amount of output, the proportion of total output value represented by labour (paid and unpaid) falls, whilst the proportion accounted for by raw material rises. The rate of profit, i.e. the profit margin thereby falls, but because the mass of variable-capital laid out rises, even if only slowly, because the rate of surplus value rises, the mass of surplus value also rises. Moreover, this rise in productivity causes the rate of turnover of capital to rise, so that for any given level of output, less capital has to be advanced. That tendency is increased because, the unit value of the raw material also tends to fall, as a result of the rise in productivity. In addition, the new fixed capital introduced does so on the basis that one machine replaces several older machines, and the value of each new machine is less than that of the older machines it replaces. So, although the mass of laid-out capital rises, to produce this increased output, and the profit margin per unit of output falls, the mass of profit itself, rises, whilst the amount of capital advanced for its production tends to fall, which causes the annual rate of profit to rise. It is the annual rate of profit, not the rate of profit/profit margin that is the basis of the average rate of profit, and is also what is determinant for capital accumulation. 

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