Post Covid Prices and Revenues - Revenues - Profit of Enterprise

Profit of Enterprise 

Surplus value/profit falls because the value of labour-power rises, as costs rise due to falling productivity, as a result of measures put in place by governments. As unemployment has surged, as a result of the government imposed lockdown, capital also finds itself funding this unemployment, as a result of taxes rising to cover benefits. Higher unemployment may press down on wages, but only where the unemployed labour is a substitute for the labour employed in expanding sectors. The unemployed hairdresser or corner shop employee is not likely to be a substitute for the high tech car worker, plane maker, web designer, software engineer or network administrator, which are the kinds of jobs that are likely to expand. 

It is falling profit amidst rising demand for capital, in these expanding spheres that leads to rising rates of interest. Interest, rent and taxes are deductions from profit/surplus value. For the reasons described, the mass of rent is likely to fall, even though rental yields will rise, because land and property prices will crash. The mass of interest, and rate of interest/yields will rise as more capital is employed and the prices of bonds and shares falls. The rate of tax will also rise for the same reason, even if the amount of tax revenues remained the same, but with high levels of unemployment, and a need to subsidise and stimulate strategic industries, as well as increase infrastructure spending, taxes will need to rise. Even with massive increases in borrowing that debt has to be paid back, and the only way to do that is via tax revenues. 

Profit of enterprise is what remains of profit/surplus value when rent, interest and taxes are deducted. Its from profit of enterprise that the additional money-capital to enable capital accumulation is derived. That is why, as Marx sets out, in Capital III, Chapter 15, a rise in the rate of profit is not the same as a rise in the profit of enterprise, and so potential for accumulation. 

If the rate of rent or rate of interest or taxes rises then these deductions from profit may be greater than the rise in profit itself, so that the amount left over as profit of enterprise falls. A fall in profit of enterprise means that firms must borrow more money-capital to fund expansion, and so they also have less realised profits to throw into money markets. It increases the demand for, and reduces the supply of money-capital, thereby causing interest rates to rise. 

Take a company that sees demand for its output rise, after the end of lockdown. For many companies, such a rise in demand is inevitable, because currently such demand is zero. There has already been a sharp rebound in demand, in the US for vehicles, and for executive jets. This is why PMI numbers are likely to zoom above 50, when the lockdown ends. It simply means that demand is no longer zilch. But, normally, firms pay for circulating capital out of their sales. In other words, workers produce goods and services, which are then sold. The money obtained from the sales pays the workers wages, and provides the capital to buy materials etc. for the next lot of production. But, the lockdown has caused a rupture in the circuit of capital for some businesses, and has modified it for others. Some businesses have had no sales for ten weeks, so that they have no money to pay for wages, or to buy materials and so on. To restart they must either inject additional capital of their own, or else borrow it. 

A large company, therefore, may need to issue bonds to obtain money. However, as the increased demand for money-capital meets falling supply of money-capital, as profits have disappeared, and savings have been raided, so that interest rates rise, the company will have to offer a higher coupon on such bonds. That will not affect the interest paid on its existing bonds, whose prices will now fall, but it does mean it pays more interest overall. The same applies if it issues new shares; it will have to sell those shares at a lower price. 

Conclusion 

The measures put in place as a consequence of the lockdown and the virus means that productivity falls from already low levels. That means that values and so costs rise. Of itself, this implies a tie-up of capital, requiring additional borrowing and a squeeze on the rate of profit. It means the value of labour-power rises, causing wages to rise and the rate of surplus value and rate of profit to be squeezed. The rise in unemployment is unlikely to press down on wages, because its likely to be a rise in the unemployment of already precariously employed labour, whose condition, however, may deteriorate further. The long-term damage to health from the lockdown is likely to be much more serious than anything COVID19 would have inflicted. Increased employment is likely to come in high-tech/high value production where there are labour shortages. 

Wages are likely to rise because of the rise in the value of labour-power, and because of rising demand for high value labour in new growth areas, and in traditional industries like cars and planes as states bail-out and recapitalise those industries. 

The rise in values and costs causes the value of constant capital to rise. That means that capital is tied-up, and the rate of profit falls. As economic activity picks up, more capital will be borrowed, causing interest rates to rise. Business, government and households must pay more interest on new debt and on existing debt held on variable rates. Higher interest rates causes the prices of bonds, shares, land and property to crash. Much lower land and property prices leads to renters becoming buyers. The fall in demand for rental property causes rents to collapse, especially as landlords who held property for capital gains now must rush to sell to avoid capital losses. 

Governments have paid out vast amounts to cover the wages of furloughed workers. Whether by borrowing or money printing, the paying of wages to sustain monetary demand, whilst simultaneously suppressing supply by telling workers to stay home is highly inflationary. Creating even more liquidity, and diverting it (necessarily) into general circulation at a time when massively increased borrowing and reduced supply of money-capital from profits and savings causes interest rates to rise, is even more inflationary. The higher interest rates cause asset prices to crash with now no potential to repeat the process after 2008. Its no longer possible to impose greater austerity – unless some form of Bonapartist regime imposed it at the end of the barrel of a gun – to prevent wages and interest rates rising. As asset prices crash all of the liquidity locked up in fictitious capital will rush out, as owners of capital seek real returns from productive investment. In short, the process that created a hyperinflation of asset prices, over the last thirty years will reverse causing a large spike in inflation, if not a temporary hyperinflation of commodity prices.  Its what I predicted in my book, Marx and Engels' Theories of Crisis: Understanding The Coming Storm

That inflationary spike will not last, because the final bursting of the asset price bubbles will clear the way for the Spring Phase of the long wave cycle to burst out of its artificially induced coma. It will see a strong increase in global production, absorbing the excess liquidity, and with the Spring Phase of the cycle making a rapid transition to its Summer Phase, as a result of this quickened pace of activity.

Revenues - Interest and Rent