The Economic Situation (3/6)
By 2007, this increase in economic activity did begin to cause wages to rise in some spheres, and the rise in primary product prices continued to take place, stimulating a rash of investment into new mines and quarries across the globe, and investments in new industrial scale farming in Africa. With large amounts of liquidity sloshing around the global economy, prices rose, sparking fears of inflation. Alistair Darling appeared on TV to plead with workers not to push for their wages to keep pace with rising prices, as tanker drivers won a 14% pay rise after just a 2 day strike. But, none of this represented any kind of serious threat to profits, which were still at very high levels. What it did pose a threat to was the rate of interest.
As economic activity expanded rapidly, businesses needed to expand rapidly to meet rising consumer demand, or else they would lose market share to competitors. Even marginal squeezes on profits, at a time when capital needs those profits for capital investment, means that it has to rely more on borrowing to finance that investment. As the demand for capital rises relative to the supply, so the price of capital, i.e. the rate of interest rises. Again, this posed no threat to real capital itself because, it could easily afford small absolute increases in the interest it had to pay, out of its rapidly rising masses of profit. What it did pose a threat to was the vast mountains of financial and property assets whose prices had been inflated over the previous 25 years.
The rising masses of profits, produced during the 1980's and 90's, as the rate of profit steadily rose, along with the release of capital created by rising productivity and falling values of fixed and circulating capital, led to falling interest rates. Falling interest rates meant the capitalised value of revenues on assets rose, causing asset prices to rise. The deregulation of financial markets, by Thatcher and Reagan, in the late 1980's, gave a further spur to the creation of these asset price bubbles. When the first of those bubbles burst in 1987, it led to central banks intervening to pump liquidity into the system, and cut their official interest rates, so as to reflate the prices of these assets.
The reason this is significant is this. In the latter part of the 19th century, the monopoly of private capital, as Marx calls it, had become a fetter on further capital accumulation. In other words, the privately owned businesses, even those of the richest capitalist families could no longer mobilise the resources required for the scale of modern production. This fetter on production was “burst asunder”, and these large private capitalists were expropriated by new large socialised capitals, in the form of joint stock companies and cooperatives. These joint stock companies were able to borrow on a massive scale, by issuing shares which could be bought by thousands of people, as well as by banks and financial institutions which mobilised the small savings of millions of workers and middle class people. The days of the monopoly of private capital were over, and now the former productive-capitalists removed themselves from any function in production, and became simply money-lending capitalists, who lived off the interest/dividends on their shares, and bonds. Engels himself did that, retiring from his position in the company business, and living off the interest on his private wealth of around £3 million, in today's terms.
For a long time, the most important thing to these money lending capitalists was the revenue they could obtain on their shares and bonds. The 1929 Wall Street Crash was probably the first time when that really began to change. In the financial crashes of 1847 and 1857, capitalists who had speculated in the stock markets lost a lot of money, some of it money they had drawn out of their own companies. But, at that time, the monopoly of private capital was still preponderant. Capitalists were still primarily productive-capitalists, and their revenues came from profits not from interest and dividends. The Bank of England, in both those crashes ensured the credit crunch was eased, but did not see any requirement to reflate the prices of shares. In 1848, and 1857, the economy was in a period of long wave upswing, as it is now, and once the credit crunch ended, the economy resumed its rapid pace of growth. Its after the passing of the Limited Liability Act that this situation begins to change, and after 1865, the growth of joint stock companies increases at a rapid pace, with the biggest capitalists becoming merely money-lending capitalists. The remit of private capital is limited to the plethora of small capitals, which themselves, become increasingly dependent upon the large socialised capitals, for their existence.
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