The Economic Situation (2/6)
The solution to these crises of overproduction of capital is to undertake a technological revolution to raise productivity, and thereby replace labour. This is an essential feature of the long wave cycle, an Innovation Cycle that peaks around 40 years before the peak of the long wave itself. That means the shortage of labour is removed, and wages fall, causing profits to rise. As productivity rises, the large fixed capital stock suffers a huge moral depreciation, which again causes the rate of profit to rise, and also leads to a significant release of capital, now available for accumulation. But, with labour being replaced by new machinery (intensive accumulation), and wages falling as a result, consumer demand does not rise rapidly. If consumer demand does not rise rapidly, there is no point increasing output of consumer goods rapidly, and so demand for additional productive-capital. The capitalists put their profits into this new fixed capital, but its used to be able to produce existing levels of output more cheaply, and profitably, rather than to massively expand output or employment. Where output is increased, its of those new types of commodities, which produce high rates of profit. This is what European capitalists did in the 1930's, which leads to the period of stagnation that followed the period of crisis of the 1920's. Large amounts of profits then accumulate as money hoards, which flow into the money markets which causes the rate of interest to continually fall, because the supply of money-capital, from these realised profits expands relative to the demand for money-capital to finance real capital accumulation.
This is also what happened in the corresponding period of the late 1970's through to 1999, and the continually falling interest rates is also what brought about the initial inflation of asset prices, though it has been the desire to keep those asset prices inflated that has led to central banks being prepared to destroy currencies via QE, and has led conservative regimes to hold back economies via austerity that has meant that those asset prices have continued to be inflated after 2000, and again after 2008. But, this illustrates why the current period is not the equivalent of the 1920's or 30's. It is the equivalent of the 1890's, or the 1950's. In other words, a period in which the working-class should be on the front foot, not the back foot, when the forces of progressive social-democracy should be strengthened as against the forces of conservative social democracy or reaction.
For example, the crisis that erupted in the 1920's, as described above, was due to an overproduction of capital. Output and the accumulation of capital had reached a point whereby the social working-day could not be sufficiently expanded, so absolute surplus value could not expand, and rising wages were squeezing profits, i.e. the rate of surplus value was falling, and relative surplus value declining, or at least rising only slowly. Any further expansion of capital would cause wages to rise further, and profits to disappear or turn into losses. Profit margins on existing production were extremely tight, but new products that workers might buy were either not available, or else were still too expensive. Only when the technological revolutions of the 1920's and 30's took place, did the prices of some existing commodities fall to levels where workers could buy them, and when new types of consumer products became available, which created the basis for the post war long wave upswing.
Is that the situation that exists today? Absolutely not. The current long wave upswing began in 1999. I have set out the data, which illustrates that many times before. It is manifest in the large rises in primary product prices, the increase in global trade, and in fixed capital formation, as well as the scale of the increase in output of use values, and the increase in the size of the global working-class, which for the first time becomes the largest class on the planet. But, this commencement of a new long wave upswing is precisely the point where the rate of profit is at its highest levels, having steadily risen from the period of crisis of the late 1970's and early 80's. Along with the increase in economic activity, this high rate of profit means that increased masses of profit are also available.
This period of the commencement of a new upswing is one in which all of the new base technologies, developed in the 1970's and 80's, to replace labour, continue to raise productivity, and the pools of labour, created during the period of stagnation, of the 1980's and 90's, continue to exist to be drawn down, so that there is no upward pressure on wages, as this production expands. Moreover, in those parts of the globe where growth expands fastest, in Asia, and in the former Stalinist bloc, there is, on the one hand, vast masses of peasant labour that can be turned into industrial labour, and on the other large pools of labour that was previously grossly underemployed. All of this available labour can be employed without any likelihood of wages rising so as to squeeze profits, whilst rising productivity means that the value of labour-power falls, and simultaneously living standards rise.
In Britain, as the economy grew rapidly, in the early 2000's, and labour shortages, in certain areas, arose, for example, for skilled craftsmen like plumbers, capital was able to simply draw in some of those underemployed Eastern European workers, to ensure that wages, in those spheres, did not rise too quickly. The UK drew in 2 million workers from Eastern Europe at a time when its level of unemployment continued to shrink. The US did similar things taking in workers from Mexico, and South America. In other words, the social working day expands significantly as a result of this large increase in the amount of simultaneously employed labour, and that means that the mass of absolute surplus value also expands massively.
The rate of profit on existing production remains at high levels. Moreover, although, in the last 25 years, we have seen many new products developed, on the basis of the new base technologies, developed in the 1970's and 80's, such as mobile phones, and other mobile devices, the reality is that this is nothing compared to the potential for such new products, which those technologies make possible. And, as new products, they represent entire new markets, new sources of potential demand, profits and employment, as Marx describes in the Grundrisse, in relation to The Civilising Mission of Capital. As new products, they also represent high profit areas of production.
This is the direct opposite of the conditions that existed after 1921, or after 1974. The reason that investment in these new products has not been explosive, despite the high profits, is quite simple. The owners of fictitious-capital have seen even more explosive increases in capital gains from the rises in asset prices. The owners of that fictitious-capital, i.e. shareholders appoint the Boards of Directors that control investment decisions by companies. Rather than use profits to accumulate real capital, or to develop these new products, therefore, those directors have used them to buy back shares, to buy the shares of other companies, and so on, so as to obtain these paper capital gains. The shareholders, and owners of fictitious capital have themselves used the revenues they obtain (interest/dividends) to buy more existing financial assets, thereby inflating their prices, as companies also buy back shares rather than issue more of them. The directors even issue bonds rather than shares, in order to use the money from the bond sales to buy back shares, and inflate dividend payments. And, as these corporate bond sales would have the effect of depressing bond prices, this is countered by central banks printing money so that the excess bonds are themselves bought up by themselves or by commercial banks with the liquidity provided.
This is the direct opposite of the conditions that existed after 1921, or after 1974. The reason that investment in these new products has not been explosive, despite the high profits, is quite simple. The owners of fictitious-capital have seen even more explosive increases in capital gains from the rises in asset prices. The owners of that fictitious-capital, i.e. shareholders appoint the Boards of Directors that control investment decisions by companies. Rather than use profits to accumulate real capital, or to develop these new products, therefore, those directors have used them to buy back shares, to buy the shares of other companies, and so on, so as to obtain these paper capital gains. The shareholders, and owners of fictitious capital have themselves used the revenues they obtain (interest/dividends) to buy more existing financial assets, thereby inflating their prices, as companies also buy back shares rather than issue more of them. The directors even issue bonds rather than shares, in order to use the money from the bond sales to buy back shares, and inflate dividend payments. And, as these corporate bond sales would have the effect of depressing bond prices, this is countered by central banks printing money so that the excess bonds are themselves bought up by themselves or by commercial banks with the liquidity provided.
Yet, even despite all of this financial engineering to hold back real capital accumulation, and divert profits and liquidity into such speculation, the reality of the laws of capital cannot be suppressed completely. Companies ultimately have to respond to competition for fear of losing market share and going out of business. If some new product is developed by one company, then other companies in that same sphere have to engage in that production, and so on. Elon Musk pioneered the development of electric vehicles, but now all car companies, and other types of companies have entered that production. Space technology, once the preserve of state capital is a vast new area of capital investment and profits for companies like Spacex and Virgin Galactic etc. But, even this is dwarfed by the potential for the development of personalised healthcare solutions, biotechnology, genetic technology and cybernetics.
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