In fact, it is precisely at those points when economic activity is feverish that such crises do tend to occur. High profits, realised from rapidly rising demand, encourage a rapid pace of capital accumulation, the mass of profits may be rising sharply even as profit margins get ever narrower. But, for any particular commodity or set of commodities, this rising level of production, at some point hits the roadblock of the price elasticity of demand and the income elasticity of demand, as Marx referred to earlier. The higher the level of output of widgets, the greater the potential that the demand for widgets at their price of production will be satisfied. As wages rise, as labour supplies get used up, workers may decide that with their higher wages they will shift their consumption away from widgets to gadgets. That is clearly seen in relation to food consumption. As living standards rise, workers shift their consumption away from some types of food, and towards other types of food, that previously they could not afford. In the past, that has been seen in relation to margarine and butter, for example. As I have described elsewhere, it has been seen in China, as living standards rose. In 2005, Chinese consumption of Meat was 2.4 times what it was in 1990, Milk 3 times, Fruit 3.5 times, Vegetables 2.9 times, Fish 2.3 times, whilst its consumption of Cereals mostly rice fell by 20%. The large rise in demand from China and other developing economies, was part of the reason for the spike in global food prices at the end of 2007 and beginning of 2008.
As Marx describes in Capital III, Chapter 15, this overproduction of capital causes the rate of profit, therefore, to be squeezed from two directions. Firstly, it means that as the reserves of labour are used up, it becomes impossible to increase the social working day, which means that absolute surplus value cannot be expanded. As that process extends, it means that wages also rise, so that relative surplus value is also reduced. So, profits are squeezed from this side of production, as surplus value is constrained. But, also, as it becomes more difficult to expand the market at the same rate as the expansion of production, at market prices that reproduce the consumed capital, so profits are squeezed also from this other side, of consumption.
“Hence, because demand is limited by production, it by no means follows that production is, or was, limited by demand, and can never exceed the demand, particularly the demand at the market price.” (p 119)
A similar thing can be seen in relation to primary product prices, which also clearly indicate the point made earlier about capital only investing in longer-term, large-scale fixed capital investment when it is confident that a new, higher, sustainable level of demand has been created. After 1999, primary product prices rose sharply, as the new long wave expansion got under way. But, large-scale investment in new mines, quarries etc. did not arise immediately. The following industry comment, in relation to copper, explains why.
“As a result of booming demand, operating profits in the copper industry have grown dramatically – operating margins up from 8% in 2001 to 38% in 2005. So why does copper supply not increase faster, as the industry clearly has plenty of cash to invest? To answer this question, we need to look at the basic economics behind investment decisions in the copper industry. Much of the added value in production of copper arises in the mining stage: only 25% of added value is in smelting / refining but the rest is in extraction and processing of copper ore. Thus the key supply constraint is the limited number of mines. When copper demand was lower, there was a surplus of production capacity and additional supply could be added simply by increasing throughput from existing mines. But supply cannot be increased indefinitely without additional copper production capacity, i.e. new mines. Despite the prevailing very high level of copper prices, copper supply from mines has not risen as fast as might be expected. The economic theory is that when prices rise due to higher demand, supply will increase as it becomes possible to operate marginally economic mines at a profit due to the higher prices. The problem in practice is that copper is supplied from facilities that require huge investment in the mine and supporting infrastructure, and a major investment decision is required. A short-term rise in copper prices – even when sustained over several months – does not necessarily change industry investors’ perceptions of the long-term copper price. Mining companies will not invest in a project unless their expectations of long-term prices are at a level where the project becomes attractive.”
This is the same point as that made by Marx in his long wave analysis in relation to agricultural production and prices, in Theories of Surplus Value, Chapter 9. Marx makes clear there that at a certain point it becomes necessary to invest in new mines, farms and so on. The natural fertility of these may be higher than that of existing facilities, but they may be more remote, requiring capital investment in fixed capital infrastructure, such as new roads, railways, ports, storage facilities and so on. The land itself may require large scale investment, for example, clearing of rainforests in Brazil, the clearing, drainage, and irrigation of farmland and so on. As Marx sets out, it may take ten years or so, for all of this fixed capital investment to raise the actual fertility of these production facilities to those of the existing farms, mines, quarries and so on. But, at that point, these new facilities begin to reduce the market value of output, and as their output continues to rise, they press down increasingly on market prices.
That is what was seen, this time too. In 2014, as all of the investment in new farms across the globe, in new copper, iron ore, mines and so on, began to result in their output hitting the market, the prices of all these commodities dropped significantly, as did the price of oil, as new technologies such as fracking, brought new supplies of shale oil and gas on to the market, making the US once more into the world's largest producer.
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