Monday, 6 January 2020

Theories of Surplus Value, Part III, Addenda - Part 27

For the private capitalist, it, therefore, seems that when they employ their capital productively, the revenue from it is comprised of two elements. The first part is merely interest. In other words, it is what they would expect to receive from it simply as a result of it being capital. Any additional return above that they then see as a specific return or profit attributable to their skill as an entrepreneur

“Hence also the pretty phrases used by some vulgar economists to the effect that, if the industrial capitalist did not get any profit in addition to interest, he would lend his capital out for interest and become a rentier, so that all capitalists would stop producing and all capital would cease operating as capital, but nevertheless it would still be possible to live on the interest. In similar vein, Turgot has already [said] that if the capitalist received no interest, be would buy land (capitalised rent) and live off rent.” (p 478) 

It is, of course, true that part of the process of forming prices of assets, on the basis of capitalised revenues, depends on this. If the rate of interest rises, for example, the coupon on newly issued bonds rises. That means the yield on existing bonds is lower. The yield is equalised as the price of those bonds, in the secondary market, falls. But, similarly, the yield from rents also falls relative to bonds, and so land prices fall, as landowners seek to sell land and buy bonds. The same applies to shares. 

However, as Marx sets out, in Capital III, the idea that it is possible to simply take all capital out of productive use, and utilise it as interest-bearing capital instead, is absurd. The interest only exists because the industrial profit exists. If industrial capital ceases to exist, and so industrial profit is not made, then the interest also ceases to exist. The rate of interest is a function if the demand and supply for money-capital. If industrial capital simply reduces its demand for money-capital then the rate of interest will fall. If industrial capital uses less of its realised profits for capital accumulation, and instead throws this money into the money market, the supply of money-capital will rise, and so the rate of interest will fall. 

As Marx put it in Capital III, Chapter 23

The industrial capitalist, “has the choice of making use of his capital by lending it out as interest-bearing capital, or of expanding its value on his own by using it as productive capital, regardless of whether it exists as money-capital from the very first, or whether it still has to be converted into money-capital. But to apply it to the total capital of society, as some vulgar economists do, and to go so far as to define it as the cause of profit, is, of course, preposterous. The idea of converting all the capital into money-capital, without there being people who buy and put to use means of production, which make up the total capital outside of a relatively small portion of it existing in money, is, of course, sheer nonsense. It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.” 

This can be seen in the period from the mid to late 1980's onwards. In the 1980's, in response to the overproduction of capital in the 1970's, and consequent squeeze on profits, due to rising wages, capital entered a period of intensive accumulation. A new Innovation Cycle that peaked in 1985, saw a range of new labour-saving technologies introduced. This set in place the process that Marx describes in relation to his Law of The Tendency For The Rate of Profit To Fall. A relative surplus population is created. That causes wages to fall, and the rate of surplus value to rise, ending the squeeze on profits that resulted from the overproduction of capital, in the previous period. Although relatively less labour is employed, absolutely more labour is employed, as capital now accumulates on this more intensive basis. The basic cause of that is rising social productivity due to those technological innovations. 

As these technological innovations raise productivity they have other consequences. They reduce the value of wage goods, so that the value of labour-power falls, causing the rate of surplus value and rate of profit to rise further. Secondly, they reduce the value of all fixed capital via moral depreciation. That means that there is a significant release of capital that is available either as a conversion of capital into revenue, or for additional capital accumulation. Either way, it represents a huge conversion of capital into revenue that is effectively thrown into money markets to thereby reduce the rate of interest. 

As Marx described in Chapter 22, the other effect of this release of capital is to raise the rate of profit, because any given mass of profit now buys more fixed capital, materials and labour-power. The same rise in productivity reduces the value of raw material etc. Moreover, technological innovation means existing materials are used more efficiently, and new alternative materials are introduced. That means that again capital is released in respect of this constant capital, and a further increase in the rate of profit is produced. The combination of this huge release of capital into revenue, along with the rise in the rate of profit, means that the supply of money-capital relative to its demand increased significantly, reducing the rate of interest from the mid 1980's onwards. 

Its further effect was to cause the blowing up of asset prices. As fictitious capital is the main form of private wealth for the dominant section of the ruling class, they became addicted to these inflated asset prices, as opposed to revenues produced by those assets. They simply liquidated some of their paper capital gains as a means of producing revenues. When interest rates began to rise, therefore, causing asset price bubbles to burst, they used every lever to try to reflate them. They have used their position on company boards to raise dividends at the expense of capital accumulation; they have used profits to buy back shares; and even borrowed on bond markets to provide additional liquidity to buy back shares; they have used central banks to print money and buy bonds; and they have used governments to implement austerity so as to hold back economic growth, so as to restrict the rise in market rates of interest. 

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