The Rule of Unelected Ruling Class Judges - Part 10 - Conservative Social Democracy v Progressive Social Democracy (2)

Part 10 - Conservative Social Democracy v Progressive Social Democracy (2) 

What Thatcher's government represented was the end of the period during which progressive social-democracy was in the ascendant, and the start of the period in which conservative social-democracy replaces it. In the long wave, post war uptrend, rapidly expanding socialised capital produces rapidly expanding profits. The rapidly expanding profits also meant that the revenues from those profits – interest/dividends, rents, and profit of enterprise could expand along with it. It doesn't require that the rate of interest or rate of rent needs to rise. More land being cultivated results in more rent, even if rental per hectare falls. More profits means that even with the same dividend yield, the amount of dividends can rise, and the same with yields on bonds. That can be because either the price of shares and bonds rises, or, as with more land in cultivation, because more shares and bonds are issued. As with rental, the latter means that a greater mass of dividends/interest is also compatible even with lower yields. 

During most of this period, even though interest rates and rates of rent do not rise much, or even fall, this does not result in large rises in asset prices, because a large portion of revenues are poured back into real capital accumulation, rather than into speculation in existing assets. Indeed, because more land is brought into cultivation, and more bonds/shares are issued to finance additional real capital accumulation, this additional supply of assets/fictitious capital, acts to push the price of those assets down, counteracting the forces pushing them up. The interests of the owners of fictitious capital are then consonant with the interests of large-scale socialised capital, and whatever helps that socialised capital to produce more profits is thereby in the interests of the owners of that fictitious capital whose main concern, during this period, is to maximise their revenues. 

The end of this period of uptrend changes those conditions. Already, in the 1960's, as wages rise, because the period of extensive accumulation of capital means that labour supplies start to be used up, this begins to squeeze profits. By the 1970's, this rise in wages, at a time when the rise in productivity also slows, causes this squeeze on profits to intensify. It results in a crisis of overproduction of capital, i.e. wages rise to an extent that any additional employment of capital only pushes wages even higher, to a level where the additional labour produces no additional surplus value, or even reduces the actual mass of surplus value, as a result of a falling rate of surplus value. The additional capital cannot act as capital. It has been overproduced. 

Anyone doubting the role of interest rates on asset prices, only
need look at this chart.

As this period of squeeze on profits occurs, during the 1960's and 70's, capital is still seeking to expand. The very rises in wages that squeeze profits, means that the demand for wage goods rises sharply, illustrating, as Marx says, that such crises are not, as Malthus and the Keynesians believed, due to “underconsumption”. Every capital involved in wage goods production seeks to expand to meet this increased demand, and thereby expand its mass of profit, and if possible its share of the market. It must accumulate additional capital, including more constant capital, and more workers. In the process, thereby, the suppliers of machines, materials and so on to such companies also seek to expand to meet this increased demand. But, now, they must expand at a time when their own profits are being squeezed. They must finance a greater proportion of their expansion not directly from their own profits, but by borrowing more money-capital. They can take out bank loans, issue more bonds or shares as a means of doing so. Whichever option they take, it means that the demand for money-capital rises relative to its supply, and so this causes interest rates to rise. This rise in interest rates now causes the prices of assets to fall, because asset prices are determined by capitalised revenues. Speculators will offer lower prices for any newly issued shares or bonds, in order to obtain a higher yield on them. This fall in asset prices, during the period of the 1960's and 70's, is hidden because of the effect of inflation during the period. As inflation rose, so asset prices rose too. But adjusted for inflation, asset prices fell between 1965 to 1982, as interest rates rose. 

The underlying divergent interests of the owners of fictitious capital from the interests of socialised capital now sharpens. The former represent the dominant section of the ruling class, and the fraction that wields political control. But, this reality itself rests upon a contradiction. As Marx describes in Capital III, this fictitious capital, as its name suggests, is not real capital. It does not independently self expand. It only expands, in the form of interest/dividends, because productive-capital, bought with the loaned money-capital, itself self-expands via the appropriation of the average profit, which itself is dependent upon the creation of surplus value in production. Interest-bearing capital (fictitious-capital), like merchant capital and landed property, is thereby always ultimately subordinated to productive-capital. But, this plays out as a competitive struggle between these different fractions of capital. 

Landed property seeks to obtain higher rents, but if rents rise to a level whereby capital cannot make the average profit, the demand for land will fall, and rents will drop. Commercial capital seeks to force down the prices it pays for the elements of commodity-capital it buys from producers, but if commercial profits rise above the average annual rate of profit, capital will leave productive activity and enter commerce, thereby increasing competition in that sphere, causing profit margins to fall, and prices paid to producers to rise. Interest-bearing capital will always seek to extract the highest rate of interest, but if interest rates rise too high, the demand for money-capital will fall, whilst producers will put more money into the money market, and finance more of their investment internally from profits, thereby depressing interest rates. 

As Marx points out, in Capital III, Chapter 23, if too much money goes into becoming interest-bearing capital, this money-capital becomes depreciated. It causes interest rates to fall, and thereby causes the price of financial assets to rise, so that the depreciated money-capital buys fewer of these financial assets. This is what has caused the black hole in pension funds, as the price of the assets they must buy to provide future revenues increased astronomically. Marx describes this in the above chapter, pointing out that, as the rate of interest then falls, the revenues (interest) for some of those that depend on them for their existence, drop so low that they cannot survive on them. They must then convert themselves back into productive-capitalists, obtaining profits rather than interest/dividends. Of course, many ordinary workers that previously relied on interest from savings, to supplement their pension etc., cannot do that. Instead, they have been encouraged to become buy-to-let landlords. 

What Marx could not have envisioned is that there was another alternative to the owners of fictitious capital disposing of it and becoming productive-capitalists. That is that, rather than relying on the revenue produced by these assets, they could instead rely on continuously rising asset prices producing large capital gains, which could then be realised, and used to convert capital into revenue. But, Marx was aware of that potential. He describes in Theories of Surplus Value what happens when savers consume the capital they have saved, rather than relying only on the interest as revenue. It means that their capital is diminished, and so the potential for that capital to provide future revenues is also diminished creating a vicious circle. And, Marx also analysed that this was what happened to the old landed aristocracy. It borrowed against its landed estates as collateral, to finance its continued lavish consumption, but that meant that increasingly, as its own revenues from rent failed to cover the interest it had to pay on its borrowing, it was forced to sell off parts of its estate. A similar thing is happening today with buy-to-let landlords, even before interest rates on their mortgages rise, simply because some of the tax advantages they previously obtained have been removed. 

Conservative social-democracy rests upon the interests of these owners of fictitious-capital. As such its own ideology is itself based upon a fiction. This illustrates Marx's theory of historical materialism, by which being determines consciousness. Because conservative social-democracy does not understand the concept of value, as opposed to price, and because, therefore, it does not understand the difference between surplus value and profit, it sees all rises in prices, particularly asset prices, as an increase in value. Because it sees such increases in prices, relative to their previous or historic price, as being a profit, it confuses capital gains with profits. This results in an obvious delusion. If the price of a house was £1,000 yesterday, and is £2,000 today, this is seen as an increase in its value, and the owner of the house is said to have made £1,000 of profit. In fact, no such thing has happened. The rise in price occurred – assuming there has actually been no change in productivity in house building – not because its value rose, but simply as a result of demand exceeding supply. Even if its value had risen due to a change in productivity, it would not mean that a surplus value had been produced or profit had been made. It would only mean that the owner of the house had made a capital gain. If potential buyers and sellers feel that this excess of demand over supply will persist, then both will speculate in order to make capital gains. Buyers will increase their demand, and offer higher prices thinking they must buy now, before prices rise further. Sellers will either hold off selling or will put their houses on the market at inflated prices, knowing that buyers will be more likely to pay it, or that if they won't this week then they will next week. 

Of course, as with all such speculation, whether its with Tulip bulbs, Railway shares, technology shares, or houses this speculative frenzy becomes a self-fulfilling prophecy. Speculative buyers increase demand, pushing prices higher, sellers seeking capital gains restrict supply at every price, again thereby forcing up prices. This speculative frenzy pushing up asset prices into ever larger bubbles occurs even though there has been no actual change in the value of the house, the tulip bulb, the railway or technology share. But, such speculative frenzies can continue for some time before the bubble bursts, and as the secondary markets for all of these assets expand and become more liquid, speculators in one asset, can switch from one asset class to another, so that asset prices as a whole can be inflated over a much longer period before the bubbles in all of them burst, as happened in 2008. 

In a period when asset prices inflate rapidly, this produces a corresponding world view about the nature of wealth creation. Similarly, when asset prices go nowhere, or fall, whilst real revenues rise, as a result of a rapid expansion of value creation, that creates another. This is being determining consciousness. We are repeatedly told nowadays, for example, that, in the long run, asset prices rise, even if they may have periodic corrections, or crashes. But, as Keynes said, in the long run we are all dead. If you had bought shares just ahead of the 1929 Wall Street Crash, it would have taken until the 1950's, before those shares would have returned to their 1929 level. It similarly, took about 15 years, before the NASDAQ recovered its 2000 level, prior to the Tech Wreck.

The same is true with property. A look at UK house prices from 1900, shows that for nearly 70 years they were essentially flat. My parents bought an old terraced house in 1947, when there was a post-war housing shortage, for £1,000. Three years later, they could have bought a new semi-detached house for just £250, and in 1975, they got just £1,000 for the house, which represented a fraction in real terms of the original price. That clearly had an effect on consciousness about how beneficial, or not, speculation on asset price rises can be.  Despite more rapid economic growth in the 1950's, and 60's, house prices rose very little.

But, in the 1980's, a whole new generation of people were introduced to the idea that the source of wealth was, in fact, such speculation, and the realisation of capital gains, rather than the creation of new value. Conservative social-democracy believes that capital gains are additional wealth, and realised capital gains are additional revenue.

Both Labour and Tory parties are coalitions of different ideologies. Labour comprises conservative social-democrats like Kinnock, Blair and Brown on its right, through to progressive social-democrats like Attlee, Wilson, Benn, Corbyn and McDonnell, to socialists, nearly all of whom are only to be found within its rank and file membership. The conservative social democrats rest upon that fictitious-capital, and the ideology it engenders. Its why Blair and Brown placed so much faith in the rise of asset prices, and ability to borrow against it, which was also behind their support for PFI. Whilst they recognised the need for planning and regulation, it was planning and regulation only at the level of the state (including international para state bodies), whilst the market itself, and the enterprises within it were deregulated, which in turn leads to the blowing up of asset prices bubbles, and in turn leads to the 2008 crash. They leave the planning and regulation at enterprise level to the shareholders, and their appointees, who understandably make hay in that environment. 

The progressive social-democrats recognise not only the requirement for this macro-economic planning and regulation, but also the requirement to extend it to the enterprise level. But, these are, after all, social-democrats with a functionalist, managerialist, bureaucratic mindset, based upon a basically trades union consciousness of bargaining within the system. Their approach to planning and regulation, at the enterprise level, amounts only to corporatism. At its peak it amounts to state capitalism, but beneath that, as the 1970's showed, it amounts to asking companies to enter into Planning Agreements, using a carrot and stick approach. Because it does not understand what capital is, and so also does not understand what fictitious capital is, its solutions are necessary confused and misplaced. 

That can be seen in the proposals of the current Corbyn/McDonnell leadership. It does not understand that the capital of companies is owned by the company itself and not by the shareholders. So, its proposals to buy these companies, by buying out the shareholders, are both hugely expensive and unnecessary. If we take a company like Severn Trent, its capital does not belong to its shareholders; it belongs to Severn Trent itself, as a legal entity. Its impossible, therefore, to buy Severn Trent from its shareholders, because they do not own it to begin with. All they own is their shares, a debt instrument that enables them to obtain interest on those shares, in the form of dividends. Buying out Severn Trent shareholders by issuing bonds to raise money for that purpose, is a rather pointless exercise. Simply directly converting the shares into bonds would be a more rational proposal. But, not even that is necessary. 

The immediate effect of converting Severn Trent shares into bonds would be to remove the right of those shareholders to vote at company meetings, and to appoint Boards of Directors etc. But, that ought to be the case for all shareholders anyway. There is no reason why shareholders should have such a vote, whereas bondholders and other creditors of the company do not. They only exercise that right because the ruling class, via its representatives in parliament, framed company law so as to give them that right to exercise control over capital they do not own. Its long past time that right was removed. Rather than unnecessarily buying out shareholders, or converting shares to bonds, a Labour government only need to change company law, so as to remove the right of shareholders to any such vote, and to ensure that industrial democracy is introduced so that, company boards are wholly elected by the company's workers and managers. But, for reasons I will come to, even progressive social-democrats will not pursue such a course. 

On the Left of the Labour Party, the socialists/Marxists would pursue such a course, but they recognise that it amounts to a Political Revolution. Shareholders will not surrender their control over real capital without a massive fight, and that will require not just acts of parliament, but the mobilisation of the entire working class behind what would amount to a Workers Government pursuing such a course of action. But, socialists also recognise that even this progressive social democratic agenda is not the end of the line. Simply giving workers control over their own capitalist enterprises does not end capitalism, or its laws of motion. They would continue to produce commodities sold in the market; they would sell their own labour-power still as a commodity; the commodities they produce, and sell would have to compete with other commodities, the capital they now control would continue to act as capital, forcing them to maximise their own exploitation, so as to maximise the production of surplus value for reinvestment and so on. Socialists recognise that, in order to change that, it is necessary to increasingly control and regulate the market itself, and to plan production so as to meet human needs rather than to produce profits. Even the progressive social-democrats would have to be pulled into this position as part of a Workers' Government, as opposed to being wholly committed to such a perspective. The conservative social-democrats most certainly would not commit to such a perspective, and would, as they have, instead ally themselves with reactionaries to prevent it. 

The Tory Party consists of conservative social-democrats on its left-wing, and reactionaries on its right-wing. In the post-war period, the Buttskellite conservative social democrats predominated, as social democracy expanded. But, by the 1980's they had been outflanked with the election of Thatcher as Leader, which itself arose in large part due to a palace coup. Thatcher herself is a Bonapartist figure standing between these two factions. On the one hand, she represents a continuation of conservative social-democracy, on the other, by inclination, ideology, and force of circumstance, she is the representative of reaction, of the interests of the small private capitalists from which she herself came. 

I will explore this Bonapartist nature, and how it plays out in the 1980's, in Part 11, which will appear on Wednesday

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