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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