Retail Prices

As I have set out over previous months, the underlying reality of economies is creating conditions in which prices must rise. On the one hand, government imposed lockdowns have restricted supply. Whilst lockdowns of production have largely been a sham, with about 80% of production of goods and services continuing as normal, in some spheres, production stopped more or less completely, because the consumption of the end product was banned by government diktat, as it closed down various shops, and so on. In addition to the economic damage done by government lockdowns, the need to implement measures to respond to the virus itself, increases costs, which pass through into prices. For Britain, the consequences of Brexit also increases costs, which feeds through into prices. But, there are currently other factors having an opposite effect, in the short term. 

The supply of goods and services, is not just a question of their production, but also of their distribution. The latter is undertaken by commercial capital. A look at the daily news reports shows large retailers going bust on a weekly basis. High street retailers have been struggling for years, and now government lockdowns have been the straw that broke the camel's back. Its not just that all these retailers have had to meet ongoing costs, whilst lockdowns have cut off their sales, but that the increasing move to online sales, which is what has been destroying bricks and mortar retailers, has been given a huge boost by the lockdowns. Nor is it just a question of retailers going bust because of not being able to open. The fact is that their profit margins were being squeezed anyway. The annual rate of profit of commercial capital is determined by the average annual industrial rate of profit. That is, it should be the same, so that, if the average rate of profit for commercial capital is higher than the average industrial rate, capital will move into that sphere, reducing the rate for commercial capital, and raising it for productive-capital. But, as Marx sets out in Capital III, Chapter 17, because the annual rate of profit for commercial capital is fixed by the industrial rate of profit, its profit margins are determined by how quickly it turns over its advanced capital. 

So, if the average annual rate of industrial profit is 10%, this is the annual rate of profit also for commercial capital. If it advances £100,000 of capital, it produces £10,000 of profit. If this £100,000 of capital turns over just once during the year, then the commercial capital will have a rate of profit/profit margin also of 10%. For example, if it sells just one big item during the year, it will buy it for £100,000, and sell it for £110,000. However, if the £100,000 of advanced capital turns over ten times during the year, the commercial capital can still only make the same 10% annual rate of profit, on this £100,000 of advanced capital. This is where it differs from productive-capital, which is able to produce additional surplus value, the more times its advanced capital turns over during the year. So, the commercial capital would see a rate of profit/profit margin of just 1% on its sales. For every £100,000 of advanced capital it turns over, it would now produce, just £1,000 of profit, but because it turns it over ten times, in the year, it still makes £10,000 of profit on its advanced capital, giving the 10% annual rate of profit. 

For each commercial capital, it has an incentive to try to grab as much of the market as possible, and to do so, it seeks to turn over its capital as frequently as possible. The more each commercial capital turns over their capital, the more their profit margins are squeezed, though as Marx says, this appears as though each of these capitals cuts their profit margin, in order to be able to secure more sales. 

At the present time, we see a plethora of commercial capital, with unsold stocks. It needs to get rid of this stock, while it can, and so we see a series of sales, some of it being of shops that have gone into liquidation, and where the administrators are selling off what they can in order to try to provide the liquidity required to pay off creditors, and some being other retailers who need to respond to that, to produce their own liquidity to pay off creditors, and cut their losses, to try to avoid bankruptcy themselves. None of this affects the values of the things being sold, which, have in most cases, gone up, because of increased costs, which itself implies a tie-up of capital, and drop in the rate of profit, but, what it does do is to affect short-term market prices, which are forced down, sometimes down below the price, or even cost, of production, which itself means that the commercial capitals make losses, driving more of them into bankruptcy. The question is, then, what happens when that has played out, when all of those commercial capitals have gone bust, so that instead of a surplus of supply, and tight margins, there is a shortage of suppliers, and wider margins? 

In Capital III, Marx notes that a rapid inflation of prices always precedes a crisis, and subsequent crash of those prices. But, similarly, a crash of prices, and sharp reduction in the number of suppliers, creates the conditions, once the market is cleared, for prices to rise, and the smaller number of suppliers can now restore profit margins, so that the level of prices rises. Its like the drug dealers who drop their prices to destroy their competitors, and expand the market, and who having cornered the market then raise their prices. 

In the 1980's, as Thatcher de-industrialised the economy, large chunks of manufacturing left Britain, and relocated to China and other parts of Asia. In the 1990's, and early 2000's, as large parts of Eastern Europe joined the EU, they also saw manufacturing industry relocate there, not just from Britain, but other parts of Europe, and the US too. For example, Skoda went from being the butt of comedians jokes in the 1980's, to being one of the fastest growing marks in the world, with its vehicles being ubiquitous, whether as police and emergency vehicles, or as support vehicles for the Tour de France. In the 1980's and 90's, the annual rate of profit rose sharply, for the reasons I have set out in many other places. Costs of production fell, as a result of introduction of new technologies, wages fell, as relative surplus populations were created, and latent reserves were drawn in to the labour force in Asia and Eastern Europe, and Latin America. Reductions in costs created large releases of capital available for capital accumulation. 

Economies like Britain and the US, were able to ship in large amounts of commodities from overseas, and large amounts of released capital moved from being productive capital to being commercial capital, as vast new retail parks, and then shopping malls were created. As the global industrial rate of profit rose, so the annual rate of profit for commercial capital was dragged up along with it. That meant that the conditions for the expansion of that commercial capital was set, and its profit margins could expand along with it. Commercial capital in Britain, took its cut of the surplus value created by workers in China, Singapore, Taiwan, Korea, and the Czech Republic, in the same way that commercial capital always shares in the mass of profit created by industrial capital. 

But, historically, as Marx describes, when such a process leads to an excess accumulation of commercial capital, so that its annual rate of profit falls below the average industrial rate, there is a mechanism to correct this. Capital begins to accumulate more slowly as commercial capital, and accumulates more rapidly as productive-capital. In that way, the excess supply of commercial capital is reduced, it is able to raise selling prices, and restore profit margins, and thereby restore its annual rate of profit. But, as a result of the process of de-industrialisation, this mechanism was undermined. It was no longer possible for capital in Britain to just move into the sphere of production, because, for vast areas of manufacturing, that had already shifted to Asia, and other parts of the globe. An over-accumulation of commercial capital, was then set in place that was bound ultimately to end in disaster, the readjustment could only occur in the form of crisis. 

In addition, from the 1990's onwards, as this build up of excess capital continued, instead of moving into production, it found an old form of unproductive consumption offered it the appearance of huge “profits”. That was, it found that it could engage in speculation in financial and property assets, whose continually rising prices were guaranteed by the actions of central banks, and these hugely rising prices, thereby, created the possibility of huge “profits” - that are actually only capital gains, with no corresponding increase in value or surplus value production. In fact, the property speculation itself found a corollary in the development of increasing numbers of new shopping malls, and retail parks, now with some of the revenue to finance demand for their wares coming from the conversion of these paper capital gains into revenues, along with escalating amounts of borrowing on the back of the use of escalating asset prices, used as collateral. As the retailers go bust, and have increasing difficulty paying rents even if they survive, so the property developers that are their landlords, also face sharply falling revenues, and the prices of their properties crash. Similarly, all of those property funds that pulled in speculators to finance such developments face ruin, with many of them closing in the last year, and preventing speculators from withdrawing their funds, for fear of sparking a property market crash. 

In short, the expansion of commercial capital went way beyond its normal bounds, made possible by rising rates of industrial profit, supplemented by releases of capital, and a huge expansion of credit. It was bound to end in tears. The only survivors were going to be those that were either biggest, and had the balance sheets to weather the storm, or else those that were able to reduce their selling costs way below the average. The biggest winner, of course, was the firm that combined both these features – Amazon. Its no wonder that the old inefficient high street retailers now want the government to hobble their more efficient online competitors, by introducing various taxes on internet retailers. To do so, as I wrote some time ago, would be a huge mistake. It would be like a government 120 years ago responding to calls from horse-drawn buggy producers, to tax their competitors producing the new-fangled horseless vehicles, for having the advantage of not requiring a horse! 

But, the underlying reality has not changed. The crisis of commercial capital will see forced sales in the next few weeks, hastened by the effects of the lockdown, and of Brexit, and the immediate appearance of that will be a sharp fall in the retail prices index. But, all of that excess stock is going to be cleared from the market quickly. In the Summer, when car showrooms closed, and car production was brought to a standstill, large car stocks were quickly exhausted, and when car sales resumed, demand exceeded supply, causing prices to rise. The same was seen with various labour services providers, such as hairdressers, where prices rose sharply when their facilities were able to reopen. The fact remains that costs have been increased as a result of lockdown and of Brexit, and when temporary excesses are cleared, and the number of suppliers is sharply culled, there is only one way for prices to go, and that is up. The retailers still standing, will need to raise prices to cover their increased costs, and make average profits, and will be able to do so given the reduction in competition. 

But, as the temporary excess supply is cleared, and as demand rises, as lockdowns are eased, all of the huge amount of excess liquidity that governments have pumped into economies, in furlough schemes, payments to businesses, and so on, will also slosh into circulation. Reduced supply, and reduced competition, combined with rising costs, and sharply increased monetary demand, is going to produce sharply rising inflation in 2021, and that's before the government starts printing even more money to bail out car makers, plane makers, airlines, airports and the rest of the economy.