Wednesday, 18 April 2018

UK Wages Start To Squeeze Profits

Even in the UK's sclerotic, low-wage, low productivity, debt ridden economy, wages increases have started to exceed price increases, which means that profits are getting squeezed. In the last quarter wages rose 2.8%, whilst prices rose 2.5%.  As I have described previously, this squeeze on profits arises for two reasons. Firstly, as the demand for labour-power rises, and the supplies of labour-power start to get used up, competition between firms pushes up wages. Secondly, where productivity growth is slow, the total wage bill rises more, because not only do wages rise, but proportionally more labour is employed to generate a given level of output. As the wage bill rises faster than the growth of profits, profits are increasingly squeezed, causing the rate of profit to diminish.  This is the basis for the theory of the falling rate of profit described by Adam Smith, as opposed to the Law of The Tendency For the Rate of Profit to Fall, developed by Marx.

As I have previously described, we are now at that stage of the long wave cycle. In fact, it is only because of the imposition of large scale austerity, and massive amounts of money printing and other monetary measures, to divert potential money-capital into financial speculation, in bond, stock and property markets, and away from the accumulation of real capital, over the last eight years, that global economic growth was constrained during that period, and this demand for labour-power did not develop sooner. What we are seeing across the globe is the power of the current long-wave boom, and the inability of that austerity and money printing to constrain economic growth any longer. Across the globe, the kind of rapid economic growth seen in the period 1999-2008 is resuming. 

As I have set out elsewhere, that economic growth, and the demand for labour-power, which is now causing wages to rise, and profits to get squeezed, sets in place a dynamic the opposite of what has been seen over the last 30 years. As wages rise, workers have more revenue to spend on wage goods. It might be sensible, in such periods, to use any disposable income to pay down debt, but in debt soaked economies like the UK's, with low wages, and large numbers of people reliant on borrowing, the tendency is to utilise any higher wages to lever up even further, so as to buy all of those consumer goods that previously could not be afforded. In other words, consumer debt rises further, though it may shift away from the usurious lenders, towards more bank credit, which itself has further consequences. Small businesses, for example, tend not to use payday lenders to raise money-capital, but if workers turn away from the latter, and towards bank credit, that increased demand for bank credit, may cause the rates charged also to business borrowers to rise. 

The increased demand for wage goods resulting from higher wages, and from more workers in employment, inflated further by credit, causes firms to seek to meet this increased demand, goaded on by the requirements of competition. Consequently, they must employ more workers, buy in more materials, employ additional machines, move to larger premises, or open additional premises, and so on. This multiplier effect causes demand to rise even further, setting in an upward spiral. But, with wages rising and squeezing profits, in order to finance this real capital accumulation, firms need to borrow more money-capital. Consequently, alongside rising demand for bank credit from workers to finance additional consumption, goes additional business borrowing to finance expansion. At the same time, workers feeling more confident save less, and the supply of money-capital is reduced, because realised profits fall relatively, as profits are squeezed by rising wage bills, and potentially by other higher input costs. The demand for money-capital rises sharply relative to the supply of money-capital, and consequently market rates of interest rise sharply. 

As market rates of interest rise sharply, the capitalised value of financial assets and land falls sharply. The incentive for speculation in stocks, bonds and property that falling interest rates has provided, underpinned by central banks, over the last 30 years, disappears, as capital gains are replaced by significant and extended capital losses, and with extremely low yields on stocks, bonds and property, the incentive is created instead to invest in real capital, where the rate of profit is much higher, even though falling. 

That is the condition which causes the crash of those financial and property markets, and large amounts of liquidity flows out of them, and into real capital accumulation, and into commodity circulation, providing yet a further economic stimulus. It means the end of the temporary though prolonged period of dominance for fictitious capital, and the reassertion of the dominance of large-scale socialised capital, and of the social-democracy that is its corollary.

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