The United Front - Summary

Summary

• The United Front has to be distinguished from the Popular Front. The latter is an alliance at the top of the political representatives of the proletariat and the liberal bourgeoisie, the former is an alliance, in action, at the base, of the workers irrespective of whether they give their allegiance to revolutionary or reformist workers' parties.

• The United Front was a tactic devised by revolutionaries in the 1920's, arising directly out of the split of the labour movement into a reformist and revolutionary wing.

• Its mantra is “March separately strike together”.

• The tactic arose because reformist workers did not understand the basis of the split in their movement, and sought a united struggle against the attacks of capital. The revolutionaries said to the reformist workers, “We agree on a united struggle, and so we propose to join with you in united action, but we disagree with the politics of your leaders, and believe they will not follow through in defending your interests where it involves an attack on capitalism. We will fight alongside you, but we will not subordinate ourselves to your leaders, and their bourgeois politics.”

• The United Front is only possible where the labour movement is fairly evenly split between revolutionaries and reformists. If the support for revolutionaries is small – less than 25% - then they are in no position to propose a United Front to the reformist workers. They are left in a position of having to work alongside them, whilst trying to build their support. This is what Lenin proposed to the small British Communist Party in advising it to affiliate to the Labour Party. Its what the Trotskyists had to do in the 1930's, with the “French Turn”, when they began to “Enter” the social-democratic parties. Where the revolutionaries already have the support of a large majority of workers, there is again no point in the United Front tactic, as it can only be of benefit to the reformists.

• The United Front is the basis of the revolutionaries demands to the reformists and petty-bourgeois parties to form a Workers Government, by throwing out the capitalist Ministers from a Popular Front government.

Forward To Part 1

A Characterisation of Economic Romanticism, Chapter 1 - Part 13

The revenues are certainly capable of providing the demand for the supply of final output, i.e. the value of bread, and so Sismondi's statement “what is produced by all is consumed by all”, is met, provided, as Marx sets out in Theories of Surplus Value, you only mean that what is produced for consumption, is consumed by all. Its quite clear that the £1,000 value of seeds that is replaced out of the farmer's output is not consumed by all. For one thing, as constant capital, it is not something that can be consumed directly. But, more importantly, none of this £1,000 of seeds goes anywhere near the production of society for consumption. It cannot do so, because it must remain solely to replace, on a like for like basis, the seed consumed in production. 

If we were to take the society as a whole, then its output divides into £1,000 of capital, and £600 of revenue, even though, if we look at the means of production (constant capital) of the miller and baker, it looks as though they also use £400 of capital, in addition to the £1,000 of capital used by the farmer. Indeed, in terms of use value, they do.  But, the value of this capital, of the miller and baker, in fact, amounts only to the value of the revenues, the new value created by the farmer and miller. This £400 of “intermediate production” appears as constant capital, but is only revenue, i.e. v + s. 

As Marx sets out, this component of output, represented by c, continually expands, because of expanded reproduction. A proportion of this year's revenue, is not, in fact, consumed as revenue, but is set aside, and converted into capital. Moreover, as capital accumulates, even the division of labour results in rising social productivity, so that a given amount of labour processes a greater quantity of material. That means that c rises relative to v + s, and this is the basis of Marx's explanation of The Law of the Tendency for the Rate of Profit to Fall. But, again, because the GDP data does not include this element of the constant capital, any measurement of the rate of profit, and movements in it, must be wrong, and represent only a measurement of the rate of surplus value. 

Another measure of output has been proposed which is total output, so that the £200 of output of the farmer, the £400 of output of the miller, and £600 of output of the baker are all added together, giving a total output figure of £1,200, but that simply amounts to double counting the intermediate production, and still does not give the correct value of total output, which is £1,600. If the value of intermediate production of £400 is deducted that gives a figure of only £800, which is half the actual value of total output. 

And, as Marx sets out, at length, in Capital II, and Theories of Surplus Value, trying to resolve this by arguing that all those in the position of the farmer, here, actually replace their constant capital by purchasing from other producers, so that their own sales are recorded, does not work either. As Marx describes, if Department I is considered as one single business, all of these internal transactions are netted off as purchases and sales, so that they cancel out. The fact remains that all of this £1,000 of seed constitutes revenue for no one, and is simply reproduced out of capital. It cannot then form part of National Income or GDP.

Back To Part 12

Forward To Part 14

Michael Roberts and Inflation - Part 16 of 16

Roberts then contradicts everything he had previously said about “it is changes in prices and output that drives money supply”, and states,

“But capital does like some inflation, as price rises enable companies to expand production and increase profits at the expense of wages. Thus central banks and monetary authorities try to combat the long-term tendency for price inflation to ebb by injecting money and credit (more M). Money supply acts as a countertendency to slowing value creation.”

Firstly, the hypothesis is false, for the reasons Marx sets out.  The new value creation at best only relatively declines over very long time periods, as Marx describes in his explanation of the tendency for the rate of profit to fall.  But, as Marx describes, that very same process sees the absolute amount of new value, and of surplus value itself expand massively, as a result of a greater volume of capital and labour being employed.  As Marx, describes in Theories of Surplus Value, in fact, this same process driven by rising social productivity, also reduces the value of fixed capital potentially by more than the quantity of it employed (one machine replaces several older machines), at the very least, as he sets out in Capital III, Chapter 6, the proportion of fixed capital value in output continually declines, as both its value declines, and its productivity increases.

As Marx sets out in explaining the Law of The Tendency for the Rate of Profit to Fall, it is actually driven by the rise in the Technical Composition of Capital, whereby rising productivity causes a greater volume of raw material to be processed, so that it forms a growing proportion of the value of final output.  Its this element that Roberts actually obliterates from his theory, equating constant capital rather with fixed capital (capital goods), the demand for which he then explains, like Keynes, by conflating it with Net Investment.  In fact, given the technological developments in agricultural and primary production, there is no reason why the value of materials, as with the value of fixed capital, should not decline by a greater proportion than the increase in the physical quantity of them consumed, so that rather than forming a growing proportion of total output value, the form a smaller proportion, which would reverse the mechanism of the falling rate of profit!  More significantly, in economies where 80% of new value and surplus value production comes from service industry, rather than manufacturing, the growth of the physical mass of raw material processed, does not occur, and so the mechanism is made redundant.

But, even assuming none of that then, why would central banks bother, when, according to Roberts earlier argument, it is changes in prices and output that drives money supply, not vice versa, and so any increase in money supply, he argued, would simply result in a lower velocity of circulation!

He says,

“Indeed, for the last 20 years, central banks have failed to achieve their target rate of inflation of around 2% a year with zig-zags on interest rates and monetary controls.”

But, that assumes that their primary aim was that 2% inflation target, which it wasn't. Indeed, prior to 2008 inflation went above it, leading to official interest rates being raised, which acted as a spark to the financial meltdown of 2008. After 2010, UK inflation went as high as 5% for some time, even despite the austerity. Their primary target was to reflate asset prices, the main form of wealth of the top 0.01%, and they have done that extremely successfully, in part due to keeping inflation low, by diverting money into asset speculation, and by measures of fiscal austerity to slow economic growth, which they would not have implemented if their real goal was economic expansion, and higher commodity price inflation!

He continues,

“A Marxist model of inflation, which I have outlined previously, suggests that it is the movement of profits and investment demand, along with money supply growth, that will drive price inflation this year and next.”

This is, in fact, the Ricardian, rather than Marxist model. It was Ricardo who argued that investment only occurs where prices/profits were rising. Marx points out that investment/capital accumulation takes place each year – other than where there is a crisis – because capitalists assume the market itself will grow each year, and, by adding additional labour-power, materials and machines they make that a self-fulfilling prophecy.  Ricardo argued that for farmers to cultivate additional land required higher agricultural prices so that it enabled the payment of rent from higher agricultural profits.

"Although considerable rise or fall in market-prices affects the volume of production, regardless of it there is in agriculture (just as in all other capitalistically operated lines of production) nevertheless a continuous relative over-production, in itself identical with accumulation, even at those average prices whose level has neither a retarding nor exceptionally stimulating effect on production. Under other modes of production this relative overproduction is effected directly by the population increase, and in colonies by steady immigration. The demand increases constantly, and, in anticipation of this new capital is continually invested in new land, although this varies with the circumstances for different agricultural products. It is the formation of new capitals which in itself brings this about. But so far as the individual capitalist is concerned, he measures the volume of his production by that of his available capital, to the extent that he can still control it himself. His aim is to capture as big a portion as possible of the market. Should there be any over-production, he will not take the blame upon himself, but places it upon his competitors. The individual capitalist may expand his production by appropriating a larger aliquot share of the existing market or by expanding the market itself.”

(Capital III, Chapter 39)

As Marx describes, in conditions when the economy is growing rapidly, firms have to respond to that by accumulating capital, even if their rate of profit is falling, because any failure to do so, will result in them losing market share, and so being squeezed out of business. In the conditions, we have now, it seems unsustainable for Roberts to claim that it is profits that will be driving economic expansion in the year ahead, as a result of investment promoted by those profits.

Profits have been decimated as a result of government imposed lock-downs. Indeed, not decimated, which implies reduced by a tenth, but, in many cases, destroyed entirely, turning into losses, as firms have had to meet costs, without any sales. On the basis of Roberts' argument that it is growing profits that explain increased capital investment that fuels economic expansion, then the crushed profits that businesses have suffered ought to result in a huge reduction in capital investment, leading to a powerful recession of the type that Roberts has been predicting annually for the last ten years. Indeed, a year ago, when Roberts was demanding that economies be shut down to avoid tens of thousands of deaths from COVID, that is precisely the argument he was making  (See his WW posts: Prepare For The Scarring, 7/5/20, and Underlying Weakness Exposed, 16/7/20, which both echo the position he had argued on his own blog that there would be a "Post Pandemic Slump"), whilst I pointed out that, it would depend upon whether capital itself was destroyed, in the interim, and whether the conditions existed at the end of it, for demand to increase rapidly. But, the opposite of what Roberts' theory suggests is happening, and, as I predicted, demand is surging, forcing firms to respond to it, by engaging in capital accumulation so as not to lose market share. Despite crushed profits, firms are responding to sharply rising demand by having to ramp up their own production. The money demand is not coming from the source that Roberts theory describes, but from the liquidity that the state has injected into the system and paid directly to consumers.

Indeed, as demand increases sharply, firms are not just seeing that their last year's profits turned into losses, but that their rate of profit on current production is being severely curtailed too, because ongoing restrictions have raised costs, and reduced rates of turnover, whilst sharply rising demand for inputs, in conditions of excess liquidity, has pushed up those input prices, including the price of labour, as various types of skilled labour is not available in sufficient quantity. Yet, again, this lower rate of profit has not resulted in the lower level of capital accumulation that Roberts' Ricardian model predicts, as firms have been forced, by competition, to accumulate to meet this rising monetary demand.

He says,

“this model forecasts US consumer inflation will go over 3% this year and next.”

Well congratulations on that brave call, given that US inflation is already above that level, and rising. As I wrote on 12th May,

“US CPI has risen by the most since 2008. It has way exceeded the estimates, coming in at 4.2%, year on year, more than double the Federal Reserve's target of 2%. But, the month on month figure, of 0.9%, for core inflation, poses a bigger problem for the Fed. It was three times the estimate of just 0.3%. The headline figure of 0.8%, month on month, was four times the estimate of 0.2%.”

(US Inflation Soars)

(Note: I wrote this prior to the release of the June data.  The June data release, however, simply emphasises further the point, as CPI rose to 5% - See: US Consumer price Inflation Surges To 5%)

He then talks about if inflation rises, the Federal Reserve would tighten monetary policy, but again, why would they, if, as he claims, inflation is not a monetary phenomenon but driven by costs? If the Fed does tighten policy this will increase yields, which, he says, would be a big problem for large parts of corporate America, who would face higher interest costs on their debt. In fact, this is nonsense. Most corporate bonds pay a fixed coupon for their duration. If inflation rises these fixed amounts of interest fall in real terms. Real yields, i.e. yields after inflation on much corporate debt is near zero. Its why corporations have issued bonds, in order to use the proceeds to buy back shares.

If yields/interest rates rise, as a result of inflation going even higher, then real absolute levels of interest rates would still be constrained. In terms of the cost of capital, as a determinant on whether a large corporation is going to borrow to finance expansion, it is likely to be negligible in conditions of a rapidly expanding economy in an inflationary environment. What, however, even such small absolute rises in interest rates bring about is a major fall in the capitalised value of financial and property assets. Corporations would find that the real debt burden they faced, after inflation would fall, whilst the price of bonds, and other forms of fictitious capital would be cratered. Indeed, its precisely fear of that which has led central banks and states to try to avoid rapid economic expansion in the past, and a consequent rise in interest rates.

Roberts also points to this house of cards in the realm of fictitious capital, but seeks to connect it to the real economy on the basis of his comments about corporate debt. Rather the connection is the other way around. The productive sector is indeed still decisive, as he says, but from the perspective that it is economic expansion, in that sector, that leads to rising interest rates that causes financial and property bubbles to burst. The question then is, as in 1847, 1857 and 2008 to what extent a financial crisis is allowed to impact the real economy, as a result of credit restrictions and breakdowns of the money transmission system, none of which need occur, if the appropriate measures are taken.

Back To Part 15

A Characterisation of Economic Romanticism, Chapter 1 - Part 12

Sismondi did not advance beyond Smith, whose labour theory of value, and division into revenues he took over. 

“But he tried to link up this division of the newly-created product into surplus-value and wages with the theory of the social revenue, the home market and the realisation of the product in capitalist-society. These attempts are extremely important for an appraisal of Sismondi’s scientific significance, and for an understanding of the connection between his doctrine and that of the Russian Narodniks.” (p 141) 

At the start of his work, Sismondi devotes three chapters to the analysis of revenue. In Chapter IV “How Revenue Originates From Capital”, he deals with the distinction between capital and revenue, and, from the start, examines this from the perspective of society. Repeating Smith's error that output equals revenue, he says, 

“... what is produced by all must be consumed by all...” (p 141) 

Sismondi recognises that the difference between capital and revenue is material for society, but Lenin says, he seems also to sense that this material difference for society is not as simple as it is for the individual entrepreneur. 

““We are approaching,” he makes the reservation, “the most abstract and most difficult problem of political economy. The nature of capital and that of revenue are constantly interwoven in our minds: we see that what is revenue for one becomes capital for another, and the same object, in passing from hand to hand, successively acquires different names” (I, 84), i.e., is called “capital” at one moment and “revenue” at another.” (p 141) 

It is ruinous to confuse them, says Sismondi, correctly, but, as he approaches the study, he notes that is “as important as it is difficult”, and never then actually resolves the problem he identified. That problem has been set out earlier. Lenin describes it as follows. 

“... if the revenue of the individual entrepreneur is his profit, which he spends on various kinds of articles of consumption, and if the revenue of the individual worker is his wages, can these two forms of revenue be added together to form the “revenue of society”? What, then, about those capitalists and workers who produce machines, for example? Their product exists in a form that cannot be consumed (i.e., consumed personally). It cannot be added to articles of consumption. These products are meant to serve as capital. Hence, while being the revenue of their producers (that is, that part which is the source of profit and wages) they become the capital of their purchasers. How can we straighten out this confusion, which prevents us from defining the concept of social revenue?” (p 142) 

In fact, as Marx describes in Theories of Surplus Value, there are several issues, here. Let us take an economy consisting of a farmer, miller and baker. The output of the baker constitutes final output, or the consumption fund. The farmer uses seed with a value of £1,000, labour adds £200 of new value, which is divided into £100 wages, and £100 profit. So, the value of their output is £1,200. However, their sales amount to only £200, because £1,000 of their output cannot be resolved into revenue, because it consists of the value of constant capital (seed). They cannot consume this £1,000, because it must go to replace their consumed seed, as Marx puts in in Capital III, Chapter 49, “on a like for like basis”, i.e. the physical seed must be replaced by an equal amount of seed. This £1,000 of value contained in their total output is not revenue, and is not equal to any new value created this year, but is capital, and its value is comprised of labour undertaken in previous year's, i.e. of congealed labour. If the farmer wants to stay in production, they cannot sell or consume this grain as revenue, but must set it aside as capital to replace on a like for like basis the capital (seed) consumed in production. It is consumed productively, i.e. as capital, not revenue, and it is bought out of capital not revenue. 

The farmer sells £200 of grain to the miller, and this £200 is revenue, which they divide into £100 wages and £100 profit. For the miller, this £200 of revenue (for the farmer) appears as constant capital, and, in the same way that the farmer cannot consume the £1,000 value of seed, as revenue, so too the miller cannot consume the £200 value of grain as revenue, as it is realised in the value of their output of flour, because they must replace this consumed grain, on a like for like basis, if they are to continue as a miller. The miller adds £200 of new value to the grain, as they turn it into flour. It is only this £200 of new value that constitutes revenue for them, and it is divided into £100 of wages, and £100 of profit. The value of their output is then £400, and they sell this to the baker. 

For the baker the £400 of flour appears as constant capital. But, its value comprises the £200 of revenue for the farmer, and the £200 of revenue for the miller. Despite its appearance as constant capital, it contains not one penny of value of constant capital. The baker turns the flour into bread, and adds £200 of new value by their labour, which divides again into £100 wages and £100 profit. But, again, it is only this £200 of value that constitutes revenue for them, it is only this £200 that they can spend on consumption, because out of the total output value of £600 for bread, they must set aside, £400 to replace “on a like for like basis” the flour they have consumed in production, just as the miller had to set aside £200 to replace grain, and the farmer had to set aside £1,000 to replace seed. 

If we translate this into the language of GDP data, the £200 of grain sold to the miller is accounted for as “intermediate production”. Its value is reflected in the £200 of incomes that appear in National Income data, as £100 of wages, and £100 of profits. Similarly, this £200 value of grain is deducted from the value of the miller's output, so that all that is left is the value added by labour at this stage of production. This value of flour, as “intermediate production”, then appears as £200, and this is also reflected in the National Income data as £100 wages and £100 profits. Finally, this £400 value of flour is deducted from the value of output of the baker, so that all that appears is their value added of £200, and this is also reflected in the National Income figures as £100 wages and £100 profits. 

The GDP figure for output is, then, shown as £200 grain, £200 flour, £200 bread = £600. In the National Income figures, we see Wages £300 (£100 farmer, £100 miller, £100 baker), profits £300 (£100 farmer, £100 miller, £100 baker), so that National Income = GDP = £600. The requirements of Smith's absurd dogma, and of Say's Law that supply creates its own demand, are satisfied, and general equilibrium is maintained. Except, of course, that the value of output is not £600, but £1,600, because what is missing in all of these figures is the £1,000 of value of seeds that went into the £1,200 of output value of the farmer, and which formed a revenue for no one, and was instead replaced on a like for like basis out of capital, not revenue.  In other words, what is missing is the actual £1,000 of constant capital consumed in production.

Back To Part 11

Forward To Part 13

Michael Roberts and Inflation - Part 15 of 16

Roberts says,

“Capital appropriates surplus value by exploiting labour-power and buys capital goods with that surplus value.”

This is pure Keynesianism. Firstly, he has completely obliterated raw materials as a component of constant capital in this formulation, reducing it to being solely fixed capital. Secondly, like Keynes, he explains the demand for capital goods entirely on the basis of, what Keynes calls Net Investment, i.e. capital accumulation, evading the question, thereby, of where the demand, and the fund, is to come from for the replacement of the worn out fixed capital, whose value has been transferred to output, but forms a revenue for no one. What is more, in a perverse reversal of Ricardo, who only saw accumulation as an accumulation of variable-capital, Roberts fails to notice that accumulation from surplus value also involves not just the purchase of capital goods, and raw materials, but also additional labour-power. Including that, however, would make his fudge, by the merging of investment with the replacement of constant capital obvious.

In essence, all that Roberts has done, here, is to take the Keynesian equation of Saving = Net Investment, or S = I, which Keynes introduced in an attempt to save Say's Law, and has relabelled savings to surplus value. In fact, even in these terms, this is wrong, because, as Marx sets out in Capital II, firms do not accumulate just out of surplus value. They accumulate out of the value accumulated from wear and tear of fixed capital, not used for actual replacement, and they accumulate out of other money reserves and hoards, including those brought together by banks out of workers savings not immediately consumed.

Roberts then says,

“Thus it is wages plus profits that determine demand (investment and consumption).”

Again this is just Keynes updated version of Say's Law. In place of the equation C = Y, where C is consumption, and Y is National Income, Keynes introduced the reality that not all income is consumed, i.e. there is saving. He then equates saving with investment S = I, so that the overall requirement of Say's Law is met, as now C + I = Y. But, as Marx describes, this is totally false, because consumption and investment are not the only elements of expenditure – leaving aside government spending, and exports and imports. The other main element of expenditure, which becomes the increasingly dominant element of expenditure, is the expenditure on productive consumption, on replacing the consumed raw materials and worn out fixed capital. Roberts completely evades explaining where the fund and the demand for this element comes from, and so like Keynes fudges the issue by conflating it with Net Investment.

What Roberts does is to repeat Adam Smith's “absurd dogma”, as Marx calls it, that the value of commodities, and so also the national output, resolves entirely into revenues. Its this absurd dogma that Roberts now purveys, in the name of Marxism! But, Marx, in Capital II, III, and in Theories of Surplus Value, Part I, sets out in detail that the total output value cannot be equal only to revenues, that the total product cannot be equal only to that which finds its equivalent demand in those revenues from wages, profits, rents and interest, because the latter are only equal to the consumption fund, in conditions of simple reproduction, and to consumption plus accumulation (net investment) in conditions of expanded reproduction. By claiming that the question of demand for, c, constant capital is answered by the purchase of capital goods out of surplus value, Roberts simply offers up the same sorry explanation as put forward by Proudhon and Forcade, who when asked this same question of where the demand for the constant capital came from, answered that it came from the continual expansion of production each year! That is the same explanation as provided by Keynes who equates it with Net Investment, in his identity equation I = S, where I is Net Investment, and S is normal or planned savings. The only difference in Roberts formulation is that he calls normal savings that part of surplus value that is accumulated.

But, this clearly cannot be the same as, or equal to that part of the value of output that is accounted for by the value of the consumed constant capital!

“The fundamentally erroneous dogma to the effect that the value of commodities in the last analysis may be resolved into wages + profit + rent also expresses itself in the proposition that the consumer must ultimately pay for the total value of the total product; or also that the money circulation between producers and consumers must ultimately be equal to the money circulation between the producers themselves (Tooke); all these propositions are as false as the axiom upon which they are based.”

(ibid)

As Marx describes, the revenues (v + s), are equal only to the consumption fund, i.e. the value of output of Department II, as set out in the formula for Simple Reproduction, in Capital II, Chapter 20. It is not equal to that part of national output, equal to the value of output of constant capital by Department I. And, of that value, the value of the consumed constant capital of Department I, never exchanges with revenues, never finds demand from any such revenue, but is reproduced by, and finds its demand from capital in Department I, via mutual exchange, or direct replacement on a like for like basis, by each capital, i.e. a farmer who replaces their own seed, a coal mine that replaces its own coal used to power steam engines, and so on.

Faced with this impossible conundrum, Roberts, like Keynes conflates the replacement of the consumed constant capital, with the accumulation of capital, net investment out of the surplus value. That is also what Proudhon does, and which is the answer provided by Forcade.

Speaking of the latter, Marx notes,

“Secondly, he correctly generalises the difficulty, which Proudhon expressed only from a narrow viewpoint. The price of commodities contains not only an excess over wages, but also over profit, namely, the constant portion of value. According to Proudhon’s reasoning, then, the capitalist too could not buy back the commodities with his profit. And how does Forcade solve this riddle? By means of a meaningless phrase: the growth of capital. Thus the continual growth of capital is also supposed to be substantiated, among other things, in that the analysis of commodity-prices, which is impossible for the political economist as regards a capital of 100, becomes superfluous in the case of a capital of 10,000. What would be said of a chemist, who, on being asked, How is it that the product of the soil contains more carbon than the soil? would answer: It comes from the continual increase in agricultural production. The well-meaning desire to discover in the bourgeois world the best of all possible worlds replaces in vulgar economy all need for love of truth and inclination for scientific investigation.”

(ibid, Note 53)

As Marx notes,

“One may therefore imagine along with Adam Smith that constant capital is but an apparent element of commodity-value, which disappears in the total pattern. Thus, a further exchange takes place of variable capital for revenue. The labourer buys with his wages that portion of commodities which form his revenue. In this way he simultaneously replaces for the capitalist the money-form of variable capital. Finally: one portion of products which form constant capital is replaced in kind or through exchange by the producers of constant capital themselves; a process with which the consumers have nothing to do. When this is overlooked the impression is created that the revenue of consumers replaces the entire product, i.e., including the constant portion of value.”

(ibid)

Only in this way can the fallacy that GDP equals total output, equals total expenditure, equals total incomes (revenues) be purveyed in the identity formula of Keynes that Y = C + I, i.e. National Income (Y) equals consumption plus Net Investment, and Net Investment = planned savings, which equal National Income minus consumption spending.

Marx refutes this in Capital III, Chapter 49.

"The entire value portion of the annual product, then, which the labourer creates in the course of the year, is expressed in the annual value sum of the three revenues, the value of wages, profit, and rent. Evidently, therefore, the value of the constant portion of capital is not reproduced in the annually created value of product, for the wages are only equal to the value of the variable portion of capital advanced in production, and rent and profit are only equal to the surplus-value, the excess of value produced above the total value of advanced capital, which equals the value of the constant capital plus the value of the variable capital.

It is completely irrelevant to the problem to be solved here that a portion of the surplus-value converted into the form of profit and rent is not consumed as revenue, but is accumulated. That portion which is saved up as an accumulation fund serves to create new, additional capital, but not to replace the old capital, be it the component part of old capital laid out for labour-power or for means of labour. We may therefore assume here, for the sake of simplicity, that the revenue passes wholly into individual consumption. The difficulty is two-fold. On the one hand the value of the annual product, in which the revenues, wages, profit and rent, are consumed, contains a portion of value equal to the portion of value of constant capital used up in it. It contains this portion of value in addition to that portion which resolves itself into wages and that which resolves itself into profit and rent. Its value is therefore = wages + profit + rent + C (its constant portion of value). How can an annually produced value, which only = wages + profit + rent, buy a product the value of which = (wages + profit + rent) + C? How can the annually produced value buy a product which has a higher value than its own?"

Roberts then makes a comment that seems nonsensical.

“Over the longer term, growth in T tends to slow. Why? Because T is based on capitalist production for profit and, as capitalists tend to try and raise profits through mechanisation and the replacement of labour, there is a relative decline in new value produced (because only labour can create value, not machines).”

But, T, as Marx describes it in the Contribution stands for transactions, in other words, the physical quantity of commodities produced and circulated. Far from this number declining, it increases massively as a result of the rising productivity that capitalist production brings with it, precisely by the process Roberts describes of replacing labour with machines. The consequence of this increase in transactions is contradictory. In Theories of Surplus Value, examining Quesnay's Tableau Economique, Marx looks at the way commodities buy commodities, and so reduce the need for money. In other words, in the exchanges between farmers and industrial producers, the industrial producers buy agricultural products from farmers with money. Money is obviously required for this purchase. The farmers, then buy commodities from industrial producers, but no additional money is required for this because the farmers simply use the money they have received. In effect, they bought these industrial commodities with their own agricultural commodities.

What determines how much money is required, here? If, the industrial producers buy all of their requirements in one go, for the year, they will require money to that extent to buy these commodities from farmers. Let us say £1200. However, suppose the farmers supply £100 of agricultural products to the industrial producers each month. Now, the industrial producer needs only £100 in money. The farmers then use this £100 to buy industrial commodities, and having received it, the industrial producers use this £100 once more to buy agricultural commodities and so on. In other words, in the first instance, there are just two transactions, one the purchase and sale of £1200 of agricultural products, two the purchase and sale of £1200 of industrial products. £1200 was required to circulate this £2400 of value. In the second, instance, just £100, now acts to facilitate 24 transactions, and the same £2400 of value.  In other words, it makes a difference whether a given quantity of commodities as exchanged in simultaneous transactions, each requiring currency, or in serial transactions, in which case a given amount of currency can also function several times.

But, the number of transactions is not just a function of the number of times the same total quantity might be divided into separate transactions, but is also a function of the total number of commodities produced, and exchanged. With rising productivity, this quantity necessarily rises, and so as Marx says, this expansion of the market, and of the range of commodities being traded also brings with it a much larger number of simultaneous transactions, each one requiring the currency to facilitate it.

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Northern Soul Classics - Its Bad You Know - R.L. Burnside

 

Friday Night Disco - Groove Me - King Floyd

 

A Characterisation of Economic Romanticism, Chapter 1 - Part 11

II - Sismondi’s Views On National Revenue And Capital

As Lenin says, Sismondi presents the problem he faces of distinguishing capital and revenue as one in which what is revenue for one appears as capital for another, but he never actually resolves this apparent contradiction. It was Marx, in Part III of Capital II that resolves this apparent contradiction. The problem can be described as follows. If we take something like a car, it constitutes part of final output that is consumed. As a consumption good, it forms part of revenue, i.e. it is consumed out of incomes – wages, profits, rent, interest, taxes – which are resolved out of v + s, the new labour undertaken during the year. But, the value of the car comprises more than v + s. It also comprises c, in the form of raw and auxiliary materials, such as steel, rubber, plastic and so on, and also in the form of wear and tear of fixed capital, such as the machines used to produce, the buildings in which production occurs, and so on. 

All of these items that comprise its constant capital are then the products of other producers. For the producer of steel, they also produced revenues in the form of wages and profits etc. that are resolved out of the value of the steel produced, but again, only out of the v + s component of the value of the steel. Part of the value of the steel also comprises the value of raw and auxiliary materials, wear and tear of fixed capital, i.e. of constant capital. What is revenue for the steel producer, then appears as capital for the car producer. In turn, the steel producer buys coal, and what is revenue for the coal producer is capital for the steel producer. 

All of the value of these commodities – coal, steel and so on – appears in the national accounts as “intermediate production”, and it results in widespread confusion for the same reason that Adam Smith, Sismondi and others were confused by it, because orthodox economics has continued to accept Adam Smith's absurd dogma ever since. But it also causes confusion amongst some Marxist economists too, precisely because of its appearance as “capital”. It leads them to believe that the value of all these “intermediate goods” that have the appearance of being “capital”, represent the element of c in the value of national output, i.e. it represents the c in c + v + s, that constitutes the value of total output. But, that is precisely the mistake that Smith made, and that economists have continued to make ever since. 

Of course, as Marx set out, this value of “intermediate production”, shown in the national accounts does not represent constant capital, because, whilst it has the appearance of constant capital, in relation to final output, it is only comprised of the revenues of all the producers of those intermediate goods. Not one penny of value of constant capital is contained within it. So, if we were to total up all of the value of final output, it would be equal only to the total of revenues, i.e. to v + s, not to c + v + s. Indeed, that is precisely what is seen in the GDP figure, and is why GDP is nominally equal to National Income. It is what continues the myth of Smith's absurd dogma, and the basis of the continued belief in Say's Law. 

The national accounts, i.e. GDP and National Income figures provide data on value added at each stage of production. In other words, they are a measure of the new value added by labour at each stage, i.e. v + s. (In reality, this is not true, because this added value is based upon market prices, not values, and under capitalism, market prices revolve around price of production not exchange-value, but, as the total of prices of production equals the total of exchange-values, this remains true overall.) This value added at each stage divides into revenues – wages, profits, interest, rent and taxes. There is no morsel of constant capital in the value of these intermediate goods (or, therefore, in the value of final output, as shown in the GDP data), and the fact that, at each stage of production, the fact that these goods appear as constant capital, for the next producer, does not change that. 

The reality is that the national accounts give no measure for the value of constant capital consumed in production, because this consumed constant capital forms a revenue for no one, and is not included in the value of total output, which is calculated only on the basis of value added, i.e. v + s. It is also why all calculation of the rate of profit, and changes in it, calculated on those figures, are necessarily wrong (let alone the failure to take into account changes in the rate of turnover etc. that I have set out elsewhere.

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Michael Roberts and Inflation - Part 14 of 16

So, Roberts' analysis is not just crude, but wrong, and based upon a misunderstanding of basic Marxist theory, when it comes to the questions of value, money, money tokens, money capital, inflation and interest rates, as well as the Marxist theory of demand. He fails to distinguish between money as the universal equivalent form of value, and money tokens as currency, whose value is determined by the quantity of them put into circulation in relation to the money/social labour-time they represent; he fails to take account of the time required for liquidity put into circulation to flow out into the real economy, and so have any effect on economic activity or prices; and he fails to recognise that, in the previous period, liquidity was directed into an hyper inflation of asset prices, thereby, preventing it flowing into the prices of commodities. Rather, he does recognise this latter fact, but presents it simply as a slow down in the velocity of circulation, increase in savings, rather than what it actually is, as a speculative increase in asset prices.

The Keynesians are theoretically wrong to see inflation as a consequence of increased costs, particularly rising wage costs, but, in practice, increased costs do lead to the state increasing liquidity, so that capital can raise prices, so as not to have its profits squeezed, at least up to that point, at which this leads to inflation at such a level that it threatens to destabilise the system. Usually, by that time, capital has already responded to rising wages, by engaging in technological revolutions to replace labour with capital, so as to create a relative surplus population. As in the 1920's, and in 1970's that creates conditions in which capital begins to respond to wage demands more aggressively, during the crisis phase, and as the stagnation phase is entered, in the 1930's and 1980's, the position of labour has already been undermined by this process, so that wages begin to fall, and profits rise.  This illustrates that economic phenomenon cannot be analysed in isolation from politics, hence the term political-economy.

Roberts says,

“The demand for goods and services in a capitalist economy depends on the new value created by labour and appropriated by capital. Capital appropriates surplus value by exploiting labour-power and buys capital goods with that surplus value. Labour gets wages and buys necessities with those wages. Thus it is wages plus profits that determine demand (investment and consumption).”

This is not just fundamentally wrong, it is so wrong that I find it hard to understand how any serious Marxist economist could make such a mistake. In essence, what Roberts gives, here, is not the Marxist Labour Theory of Value, but the Smithian cost of production theory of value, in which the value of commodities resolves entirely into revenues. Marx describes the view that Roberts gives here, almost word for word from Adam Smith, as Smith's "absurd dogma".  As Marx describes, this is the basis of the errors of Say's Law, as put forward by Mill, Say and Ricardo. It is also what leads to the under-consumptionist theory of Sismondi and Malthus. Lenin had to address this same error when put forward by the Narodniks, and the same error exists in the work of Keynes.

As Marx and Lenin point out, if the demand for all goods and services produced in the economy comes just from the new value produced by labour, which constitutes revenues – wages, profits, interest, rent and taxes – what about all of the value of output that does not resolve into such revenues. The value of national output consists of c + v + s. That is it consists of the value of raw materials (constant capital) produced in previous years, but consumed in this year's production, along with the value of wear and tear of fixed capital, which is value produced in previous year's but consumed in this year's production, some of which has to be physically replaced, as a proportion of machines and so on wear out, and it also consists of the new value created by labour in this year's production process, value which itself then resolves into revenues.  As Marx puts it succinctly,

“...therefore, the “annual labour,” while it created value, did not create all the value of the products fabricated by it; that the value newly produced is smaller than the value of the product.” (p 381-2)

If the total value of output is c + v + s, then it is quite obvious that the demand for all of this output cannot come from just v + s, or else there would be, every year, under-consumption equal to the value of c, or what amounts to the same thing, an overproduction equal to the value of c. Where then is the demand for c to come from? Well, it is quite obvious, also, that all of those consumed raw materials, and the fixed capital that has worn out also needs to be replaced. As Marx sets out in Capital II, Chapter 19, the demand for these commodities cannot come from revenues, which, at least in conditions of simple reproduction, all goes to provide the demand for consumption goods.  

But, not all demand is demand for consumption goods, and so does not need to be demand funded from revenues. There is also demand for all all of that constant capital, for the replacement of all that raw material that has been consumed, for all of the worn out fixed capital that must be replaced on a like for like basis. All of this is bought out of capital, not revenue and the fund for its replacement is the element of c, the value of this constant capital that is the equal component in the value of output, but which does not appear in the GDP or National Income and Expenditure figures, for the simple reason that it does not constitute a revenue for anyone.

Marx quotes Smith to set out this “absurd dogma”.

“"In every society the price of every commodity finally resolves itself into some one or other, or all of those three parts [viz., wages, profits, rent] ... A fourth part, it may perhaps be thought, is necessary for replacing the stock of the farmer or for compensating the wear and tear of his labouring cattle, and other instruments of husbandry. But it must be considered that the price of any instrument of husbandry, such as a labouring horse, is itself made up of the same three parts: the rent of the land upon which he is reared, the labour of tending and rearing him, and the profits of the farmer, who advances both the rent of his land and the wages of his labour. Though the price of the corn, therefore, may pay the price as well as the maintenance of the horse, the whole price still resolves itself either immediately or ultimately into the same three parts of rent, labour [meaning wages] and profit." (Adam Smith.) — We shall show later on how Adam Smith himself feels the inconsistency and insufficiency of this subterfuge, for it is nothing but a subterfuge on his part to send us from Pontius to Pilate while nowhere does he indicate the real investment of capital, in which case the price of the product resolves itself ultimately into these three parts, without any further progressus.)

(Capital III, Chapter 49, Note 52)

That proposition was also carried forward by Ricardo, Say, and every other bourgeois economist after them, except for Ramsay and Jones, down to Keynes.

“On the other hand, the fantasy of men like Say, to the effect that the entire yield, the entire gross output, resolves itself into the net income of the nation or cannot be distinguished from it, that this distinction therefore disappears from the national viewpoint, is but the inevitable and ultimate expression of the absurd dogma pervading political economy since Adam Smith, that in the final analysis the value of commodities resolves itself completely into income, into wages, profit and rent.”

(Capital III, Chapter 49)

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A Characterisation of Economic Romanticism, Chapter 1 - Part 10

Lenin gives Sismondi's description of how the development of capitalist agriculture, and introduction of machines, led to the ruination of millions of peasant farmers, in Britain. Sismondi, in Book VII “On The Population, Ch. VII “On the Population Which Has Become Superfluous Owing to the Invention of Machines.” also describes the same fate befalling the small producers in the towns. 

“The question is: what does Sismondi’s theory that the home market shrinks with the development of capitalism amount to? To the fact that its author, who had hardly attempted to look at the matter squarely, avoided analysing the conditions that belong to capitalism (“commercial wealth” plus large-scale enterprise in industry and agriculture, for Sismondi does not know the word “capitalism.” Identity of concepts makes this use of the term quite correct, and in future we shall simply say “capitalism”), and replaced an analysis by his own petty-bourgeois point of view and his own petty-bourgeois utopia. The development of commercial wealth and, consequently, of competition, he says, should leave intact the average, uniform peasantry, with its “moderate prosperity” and its patriarchal relations with its farm servants.” (p 139) 

But, for the reasons already elaborated, such a course of development was impossible. Commodity production for the market entails competition. Competition entails winners and losers. Winners grow larger, losers are ruined. The losers are taken on as wage labourers so that the means of production now become capital, and surplus value is extracted from the labourers as profit. The profits are accumulated as additional capital, which employs and exploits additional workers. 

“It goes without saying that theoretical political economy, which in its further development joined that of the classical economists, established precisely what Sismondi wanted to deny—that the development of capitalism in general, and of capitalist farming in particular, does not restrict the home market, but creates it.” (p 139) 

And, this applies also to the expansion of capitalism into those pre-capitalist societies. The development of the market in those societies, also leads to the development of capitalist production, which, in turn, leads to further development of their home market, and so on. 

Commodity production and exchange has existed for 10,000 years. Even under direct production, the independent producers specialise in producing certain commodities for which they have a comparative advantage, but they produce and exchange them only to better obtain the other other use values required for their own consumption, i.e. C – M – C. But, capitalist production massively expands this production of commodities for the market, and its purpose is not C – M – C, but P … C` - M`. M – C … P. That is it advances a certain value of commodities (means of production, labour-power) to production, only in order to create a surplus value, in production, which it then seeks to realise in the sale of these commodities. The value of this advanced capital is greater than the value of the commodities of which it is composed, precisely because of its nature as capital, the capacity of being self-expanding value.  But, it does not seek to realise this additional value as money for its own sake, as does the miser, but only in order to expand the mass of commodities it can again now throw into production. Again, it does not seek to exchange one set of commodities for another in order to meet its consumption needs, as does the petty-commodity producer, but only to expand its physical capital, i.e. to expand not its personal, but its productive consumption. 

“The development of capitalism proceeds simultaneously with the development of commodity economy, and to the extent that domestic production gives way to production for sale, while the handicraftsman is superseded by the factory, a market is created for capital. The “day labourers” who are pushed out of agriculture by the conversion of the “peasants” into “farmers” provide labour-power for capital, and the farmers are purchasers of the products of industry, not only of articles of consumption (which were formerly produced by the peasants at home, or by village artisans), but also of instruments of production, which could not remain of the old type after small farming had been superseded by large-scale farming.” (p 139-40) 

So, both constant and variable capital is created by this process. And, Lenin points out that this last point is important because Sismondi, having adopted Smith's “absurd dogma” that the value of commodities resolves entirely into revenues, completely ignores the question of productive consumption, i.e. the consumption of means of production by capital. 

“And again we must note that it is precisely this mistake, which, as we shall soon see, Sismondi borrowed from Adam Smith, that our Narodnik economists took over in toto.” (p 140)

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Michael Roberts and Inflation - Part 13 of 16

A similar thing could be seen with land and property. All of the additional liquidity resulted in existing property prices being bid up. Higher property prices mean that landlords can charge higher rents, which means that the capitalised value of rent in land prices rises, along with a higher capitalised value due to falling yields themselves. In other words, if money tokens are printed and used to buy bonds, thereby, pushing the price of bonds higher, the yield on bonds falls. Bondholders have an incentive to move out of bonds, and into shares or land, where yields from dividends or rents are higher. As share and land prices are pushed higher, so these yields fall too.

In respect of property, higher property prices means that builders demand land to make surplus profits from these higher prices, but as they demand more land, landowners appropriate the higher surplus profits as rent, which becomes manifest as higher land prices. Now, higher land prices become a cost of production for new property, pushing property prices higher again. The cost of land as a proportion of the cost of a house has risen from around 1% in the post-war period to 50% today.  Large numbers of people cannot then afford to buy a house to live in, and it becomes speculators who buy this property initially to obtain the higher revenues of rent, compared to interest on savings, and, then, in order to benefit from capital gains from continually rising property prices, underpinned by central banks and the state, which also intervenes with measures to stimulate demand, whenever it flags. So, the higher costs of new property reduces the supply of new property – for one thing, there is no point builders producing large amounts of new housing, when the number who can buy at these high prices is falling – whilst the monetary demand for existing property, concentrated in the hands of a few speculators, increases so that property prices continue to be inflated.

Banks and financial institutions, thereby, have a direct incentive, as a result of central bank and state policies, to channel money directly into the purchase of existing financial and property assets continually pushing their prices higher, and creating continual annual capital gains. Company executives are led to do the same, as indeed are retail speculators, who see these capital gains as easy money compared to the risks of actual capital investment, and certainly compared to the negligible yields available on savings deposits. The capital gains then become a source of revenues, as these capital gains can be monetised. Financial advisers call this “taking profits”, whilst in reality its no such thing. In fact, it is the same thing as a farmer eating their own seed corn. Of course, only a portion of the capital gain is converted to revenue, to fund consumption, and for the very big owners of fictitious capital, this proportion, even given their lavish lifestyles, is very small. Where capital gains are converted to revenue, by selling one asset whose price has risen sharply, it also simply means that this revenue can then be used to speculate in some other asset, where the speculator anticipates a larger than average increase in prices.

So, by these means, a huge paper chase of money flowing from one asset class to another in search of these capital gains is established, without any significant proportion of it flowing out into general circulation. This is enhanced by other factors. Firstly, after 1999, the fundamental laws of the long wave did result in a large increase in economic activity, and the result was rising interest rates that led to to the bubble in asset prices crashing in 2008. In the aftermath of 2008, once the system had been stabilised, in 2010, not only did central banks continue this process of pumping liquidity into the purchase of assets to inflate their prices, but states also acted to reduce the potential for a repeat of the conditions that led to rising interest rates. In other words, whilst professing their desire to stimulate economies, they introduced harsh measures of austerity, which necessarily caused economic activity to be constrained, and so reduced the upward pressure on wages and on interest rates that had caused the crash in 2008. The constraints on economic growth caused by austerity, together with the channelling of money into financial and property speculation, in search of capital gains, drained money out of the real economy, and thereby created disinflationary, and even deflationary conditions for commodity prices.

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A Characterisation of Economic Romanticism, Chapter 1 - Part 9

As Lenin says, Sismondi was far too knowledgeable and conscientious an economist to deny that the market was expanding, or that natural wealth was rising. And yet, the idea that the home market was increasing as a consequence of the increase in commercial wealth that proceeds alongside the ruination of the independent producers, offends his petty-bourgeois sensibilities, and the theories he had built on them. On the one hand, Sismondi, therefore, simply says contradictory things, and, on the other, he explains the rise in national wealth and expansion of the market on the basis of the capitalist producers' ability to sell into foreign markets. 

“As the reader sees, our Narodnik economists say the same thing word for word.” (p 138) 

But, the same is true of today's petty-bourgeois catastrophists, as well as the petty-bourgeois “anti-imperialists” who believe that this problem of markets, and the falling rate of profit, is what necessitates capital having to engage in colonialism and neo-colonialism, and “super-exploitation”. After WWII, the Stalinists had to similarly try to explain why it was that a capitalism that was supposed to be in its death agony, that was supposed to be in almost permanent crisis, as a result of the Law of the Tendency for the Rate of Profit to Fall, was, in fact, in the finest of health, with profits rising, and living standards similarly rising significantly along with it. But, it was not just the Stalinists that were wrong-footed. The Trotskyists too had believed that capitalism was in its Death Agony, as they had described it in the 1938 Transitional Programme. Only at the point that this long wave uptrend began to turn did they abandon that perspective, adopting the essentially Keynesian analysis of a crisis-free capitalism, on the basis of state intervention. 

But, in the preceding period, both had to explain this renewed vigour of capitalism that defied their expectations. What is more, they had to explain it in the context of the demolition of another shibboleth, the destruction of the old colonial empires that they had seen as the inevitable manifestation of imperialism, as described by Lenin in 1916, as the necessity to carve up global markets. 

The answer provided was a repetition of the approach of Sismondi and the Narodniks, with other equally absurd notions thrown in for good measure. So, the main thrust of the solution put forward was that capitalism/imperialism had only not suffered a catastrophic crisis, because it had exported its surpluses to the colonies, and had boosted its profits, and rate of profit by an even greater exploitation of these colonies via unequal exchange and super-exploitation. As for the colonial empires themselves having been demolished, this was really a subterfuge, we were told, that simply hid the neo-colonialism which was the form in which this greater exploitation and unequal exchange was conducted within the confines of centre-periphery relations. The problem was, of course, as with the contradiction faced by Sismondi and the Narodniks, in trying to make this argument, that the market in those “neo-colonies” was also expanding, along with the expansion of capitalism in those economies. 

They failed to distinguish between colonialism, which is based upon commercial and interest-bearing capital, in cahoots with landed property, and imperialism, which is based on large-scale industrial capital. Colonialism relies on monopoly and protectionism, as the basis of the unequal exchange, whereas imperialism relies on the extension of free trade, the creation of large single markets, and so on, and where colonialism relies on profit on alienation, imperialism relies on industrial profits from the creation of surplus value, in production. Because they continued to base themselves on the concepts of colonialism, described in Lenin's Imperialism, they were wrong-footed as imperialism led to the development of capitalist production in these “neo-colonies”, some of which developed at such a pace that they eclipsed the size of the economies of their former colonial masters. 

Alongside these Sismondist explanations was added other nonsense. For example, the Keynesian proposition that the physical destruction of capital, by war, was beneficial in restoring the rate of profit, was put forward. Its nonsense, as Marx sets out in Theories of Surplus Value, because the physical destruction of capital simply imposes additional costs, requiring a tie-up of capital, and, thereby, also reducing the rate of profit. What Marx sets out as the basis of raising the rate of profit is not the destruction of such use value, but of exchange-value, for example via moral depreciation. 

The Stalinists initially attempted to defend Varga's Law, by performing statistical acrobatics to try to show that capitalism was not really growing rapidly, and workers living standards were not rising sharply. Then, to explain things like the creation of welfare states, they argued that they were all really a bi-product of soviet communism, as western imperialism had to provide all those things to prevent workers following the example of their Eastern European comrades. Of course, these were the same East European workers who were literally dying to get out of those Stalinist hell-holes, who had to be trapped behind Berlin walls and barbed wire, and their rebellions put down by tanks and machine guns, who had to be continually monitored by huge surveillance states and so on. 

As the European Communist Parties became nothing more than reformist, social-democratic parties, and as they adopted Keynesianism as their mantra, it became easy for them to argue that the apparent contradiction, here, was not real, because, now, state intervention could mediate the interests of capital and labour, creating a crisis-free capitalism, whereby all that was required was to elect left-wing governments, who like the proposals of the Narodniks, would be able to turn the state away from the wrong path of development, and turn it on to the path of harmonious development. 

That the Stalinists could put forward such an explanation was bad enough, but the Trotskyists also made a similar argument. The Stalinists, of course, continued to portray Eastern Europe as a workers' paradise, right up to the point of its collapse, but the Trotskyists had pointed out the reality from the beginning. The Stalinist claims that imperialism had to buy off the workers to stop them rushing to the Eastern European alternative were absurd, but they were even more absurd coming from the mouths of Trotskyists who made clear that Eastern Europe was a hell-hole for workers!

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Michael Roberts and Inflation - Part 12 of 16

What has been exceptional about the period of the last thirty years is the extent to which the state has been able to control where the additional liquidity has gone, and that is due to the nature of where it was directed. The liquidity was directed into the purchase of assets, to inflate the prices of those assets. But, as Marx and Engels describe in Capital, even here, you would expect the liquidity to flow out into the general economy. If A buys shares in Company B, the money goes out of A's bank account and into the account of Company B, which then spends it on machines, materials and labour-power. The money goes from its accounts into the accounts of those from whom it buys these commodities and so on.

Similarly, if C buys the shares off A, the money they pay for them goes out of C's account, but goes into A's, who then spends it. What has been different about the last thirty years, therefore, is that instead of this additional liquidity going from within this realm of fictitious-capital, of assets, and ultimately into the real economy, it has remained trapped inside the realm of fictitious-capital. Indeed, it has not just remained trapped in that sphere, but has acted to even drain liquidity from the real economy into this sphere of fictitious-capital along with the blowing up of asset price bubbles. How was this possible? When the economy was dominated by a myriad of privately owned capitals, an increase in liquidity could be used by the owners of these businesses to accumulate capital. Why would they do that? Because they would see rising monetary demand, and rising money profits. Competition would drive them to accumulate rather than risk losing market share to their competitors. Moreover, as Marx describes in Capital III, if a rising supply of money-capital from these rising profits, relative to the demand for it, led to falling interest rates, not only would some of those dependent on interest for their revenue no longer be able to survive, but owners of firms would see greater advantage in using their profits to expand than they would in throwing it into money markets to obtain only a fraction of the return in interest that they could obtain in additional profit.

“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.”

(Capital III, Chapter 23)

So, if money profits were rising, whilst these private capitalists might use some of that for additional personal consumption – which also goes into the real economy – they would be more likely to use them for additional accumulation, rather than throwing the money into the money market, where it obtains a lower yield as interest rather than profit.

But, today, the economy is not dominated by this plethora of privately owned capitals. It is dominated by large corporations run by executives, whose position is to look after the interests of shareholders – i.e. money lenders, owners of interest-bearing capital – not the industrial capital itself. Moreover, what has been seen is that these executives can, for a long time, protect the interests of those shareholders, even as money-capital is severely depreciated, by simply handing over larger and larger proportions of profits as interest/dividends, so as to offset falling yields. As Andy Haldane has described, where only 10% of profits went to pay dividends in the 1970's, today the proportion is 70%. Furthermore, the appropriation of interest (and rents) has not been the only form in which revenues have been obtained, so that, even as the process that Marx describes above has unfolded, it has not inhibited the actions of the owners of this fictitious capital.

The corporate executives have used profits not to accumulate capital – obviously this is in relative rather than absolute terms - but to pay out higher proportions as dividends, as well as making other capital transfers to shareholders. They have used profits to buy back shares, so as to inflate share prices and flatter earning per share figures; they have issued corporate bonds, even when their balance sheets had lots of cash, and used the proceeds to also buy back shares, rather than accumulate capital; they have bought the shares of other companies, and so on. Whilst the amount of capital raised in initial public offerings, and in rights issues declined, reducing the supply of additional shares into the market, the amount of share buybacks steadily increased. Simple supply and demand meant that this reduced supply of shares causes their price to rise all other things being equal. But, all other things were not equal, because the higher proportion of profits going to dividends, along with other capital transfers, meant that shareholders, particularly the tiny number of shareholders that control all of this fictitious wealth, had increased revenues that they used to also bid for the existing shares, so that the demand for this limited number of shares continually pushed up their prices.

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