There are two ways additional capital may be accumulated, Ricardo says. Either the amount of profit rises, or the amount of profit consumed unproductively, i.e. consumed as revenue, falls.
““There are two ways in which capital may be accumulated: it may be saved either in consequence of increased revenue, or of diminished consumption. If my profits are raised from £1,000 to £1,200 while my expenditure continues the same, I accumulate annually £200 more than I did before, If I save £200 out of my expenditure, while my profits continue the same, the same effect will be produced; £200 per annum will be added to my capital” (l.c., p. 135).
“If, by the introduction of machinery, the generality of the commodities on which revenue was expended fell 20 per cent in value, I should be enabled to save as effectually as if my revenue had been raised 20 per cent; but in one case the rate of profits is stationary, in the other it is raised 20 per cent.—If, by the introduction of cheap foreign goods, I can save 20 per cent from my expenditure, the effect will be precisely the same as if machinery had lowered the expense of their production, but profits would not be raised” (l.c., p. 136).” (p 536)
So, profits may rise. That could be because the working-day is extended, or intensified (absolute surplus value), or because productivity rises, so that the amount of necessary labour falls, and the amount of surplus labour rises (relative surplus value). Profit (including rents, interests and taxes) may also rise, as opposed to surplus value, because the cost of turning the surplus value into profit, i.e. circulation costs, may fall. But, the proportion of profit available for accumulation may rise, even if the profit itself does not. As Marx sets out, in Capital II, explaining expanded reproduction, its basis is that a portion of the capitalists revenue is allocated to productive consumption rather than personal consumption. The corollary is that a corresponding amount of output goes into the production of elements of capital – factories, machines, materials etc.) rather than into the consumption goods that the capitalists would otherwise have bought.
But, there are two ways that this reduction in unproductive consumption, by capitalists, might occur. Firstly, the capitalists might become more parsimonious. They might refrain from consumption, so as to devote those revenues to capital accumulation. This, of course, is one explanation given by apologists for the existence of capital, and a justification of profits. It is the Spirit of Capitalism described by Weber in The Protestant Ethic.
There is no doubt that such parsimony did play some part in the process of primary capital accumulation, though a much bigger part was played by the role of piracy and slavery in building up masses of merchant and money-capital, prior to the expansion of industrial capitalism. There is also no doubt that millions of small capitalists spring into existence each year, largely as a result of members of the working-class, and middle-class who have saved money, in order to establish such businesses. The fact, is, however, that 75% of those businesses fail within the first five years, their assets being taken over, on the cheap, by either larger capitals, or by banks foreclosing on loans.
Finally, there is also no doubt that for some of these capitalists, decisions on whether to consume productively or unproductively will be determined by the potential rewards. A small capitalist with modest consumption needs, may find they comprise a large portion of their revenue. Yet, even they might be persuaded to reduce that consumption further, in order to invest productively, if the profit from doing so is big enough.
As I have set out in my book, Marx's Capital Translated for the 21st Century, Volume II, for the larger capitalists, with sizeable profits, and more lavish lifestyles, the choice between productive and personal consumption may be more apparent than real. If a capitalist usually spends £1 million a year on their personal consumption, taken as revenue, at the end of the year, this profit may sit in their personal account, being drawn down each month through the year. If a lucrative opportunity arises for their business, which say requires £500,000 of investment, they may, if the company account does not cover this amount, invest the additional sum from their personal account. In reality, if they draw down £100,000 per month, for personal consumption, this will not be affected. They might effectively loan £0.5 million to their business in January, whilst still having £0.5 million in their bank account, covering their personal consumption needs for five months. Provided they then draw money from their business after the five months, which the additional profits from this new investment facilitates, they will be able to keep their personal consumption at the previous level.
I have also, elsewhere, made the point that one reason for the sluggish recovery after the global financial crash of 2008 has been the role of QE. At a time when global interest rates were already at historic lows, due to the huge rise in the mass of profits, and so supply of loanable money-capital, that the revolution in productivity of the 1980's/90's brought, the concomitant was high financial asset and property prices. The prices of those assets, as with land prices, is the product of the capitalisation of their revenues – dividends, rents, interest. The lower the rate of interest, the higher the asset price.
From the 1990's, and the so called Greenspan Put, central banks put a floor under these asset prices, which today form the major component of privately held wealth – fictitious capital. In 2000, and on an even larger scale after 2008, when these asset prices crashed, central banks and capitalist states rushed to reflate them, as the paper wealth of the global top 0.01% was shredded overnight. Official interest rates were reduced to zero, so that banks could borrow for free – even as smaller businesses could not get loans, and households faced market rates of interest on credit cards and store cards of 30% p.a., and up to 4000% p.a. on payday loans – whilst central banks printed trillions of dollars of new currency, used just to buy up paper assets, and reflate their price.
A huge incentive was thereby created for the owners of any loanable money-capital to utilise it unproductively, in such speculation, in these financial assets, which amounted to little more than gambling, except that it was a rigged bet, in which the prices of those assets were only allowed to move in one direction – ever higher to the stars. Even Chinese peasant farmers were thereby encouraged to use their profits not for real capital accumulation, and expansion of their farms, but to gamble on the Shanghai Stock Market, which seemed set to double every year. In Britain, those approaching retirement, and having tiny annuities, due to these high asset prices, themselves sought to speculate by using their savings unproductively to buy property to rent out, which in the process also pushed up property prices further, and so squeezed rental yields.
The potential money-capital that goes into such speculation in financial assets, or property is just as much unproductive consumption as had the money been used to gamble in a casino. It simply inflates the prices of land or paper assets, whilst adding nothing to the stock of real capital. In the same way as any other casino, some of the gamblers make money, whilst others lose it.
But, because central banks underpinned the overall price of these assets they ensured that it became a safer bet than using the money-capital for real investment in productive-capital. Overall the gamblers in the casino apparently did better than those excluded from the casino, such as those who could not afford to buy a house, and who were left in rented accommodation, or those who had no possibility of savings to be used to buy financial assets. It meant that everyone was desperate to get into the casino, even if it meant reducing other forms of consumption, or taking on huge amounts of debt to do so, as with those in the US who bought houses using sub-prime mortgages. The fact that they only apparently did better, as against the reality, was exposed by the sequence of financial and property crashes starting from 1987. Central banks have not suspended that reality, they have only postponed its imposition over the illusion, by pumping in ever larger doses of liquidity, to each time reflate the asset prices, and thereby blow up the bubbles further, inevitably ensuring that the explosion when it next bursts will be much, much larger!
That is why the recovery from 2008 has been so sluggish, along with the impact of policies of austerity that sucked even more aggregate demand out of economies. Even company executives were induced by this to use retained profits to buy back shares, or speculate in other financial assets, rather than to invest in productive capacity. On the contrary, large corporations able to issue corporate bonds, bought up by central banks as part of QE, or bought up by commercial banks themselves provided with near free money from central banks, used the money raised to buy back shares, so as to raise the price of the shares, and at the same time to also increase dividend payments to shareholders, and provide them with other capital transfers. That in turn was used by shareholders to engage in even more speculation in financial assets driving those prices higher still.
If, as it seems, the potential for additional money printing has reached its limits, so that asset prices fall, the lack of a safe bet will disappear, and this unproductive consumption of profits will decline, releasing money-capital for capital accumulation, which will spur a more rapid economic recovery.
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