The 1970's, and early 1980's, represented the crisis phase of the long wave cycle. It was a period when the extensive accumulation of capital resulted in capital being overproduced relative to the social working-day. Wage share rose, absolute surplus value stopped expanding, and relative surplus value began to shrink, squeezing profits. As workers' living standards rose, they satisfied their demand for a series of staple wage goods, so that to expand the market for them required their price to fall by ever larger amounts, in inflation adjusted terms. Even for things such as cars, the preserve of the upper middle class, only 20 years earlier, it became common for working-class families to have 2 or even 3 per household. To sell even more of them, became ever more difficult, so that to sell what had been produced, firms found that, not only was a rising wage share squeezing the produced surplus value, but the realised profits were also being squeezed, as profit margins were reduced in order to continue to expand the market. With such large scale production, even small profit margins could produce expanding masses of profit, encouraging firms to continue to compete for their share of the market. But the smaller the margins became, the more likely it was that any increase in output, or change in demand would result in an overproduction, with market prices then falling to a level not just below the price of production, but below the cost of production, so that even small losses on each unit of output now translated into large total losses, on these huge volumes of production.
To resolve such a situation the same two things were required that have always been required when this phase of the cycle occurs. Firstly, productivity has to be raised substantially, so that the demand for labour is reduced, causing wages to fall, and surplus value to rise.
As Marx put it,
“Given the necessary means of production, i.e., a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.)
(Capital III, Chapter 15)
Secondly, new types of commodity must be developed, so that whole new markets are opened up. In other words, the process Marx describes as The Civilising Mission of Capital.
In the 1970's that resulted in a focus on new labour-saving technologies being developed, the most notable being the microchip. It meant that labour was shaken out of a whole series of jobs and industries as, with the aid of these new technologies, one person could now do the work of several workers, and what had once been skilled jobs, became semi-skilled or unskilled jobs. This created a relative surplus population, and reduced the competition between firms for labour, causing wages to fall. For a time, a powerful labour movement, built up over the previous twenty years of rising employment and living standards, resisted attempts to reduce wages, but for the reasons Marx and Engels had set out, it was always going to be a doomed project.
As soon as the relative surplus population begins to develop, it becomes competition between workers for jobs, not competition between capitals for labour that is decisive. Firms do not have to offer higher wages to attract new workers. When new businesses develop, using the new technologies, such as the instant print shops that sprang up in the early 1980's, for example, they no longer required the skilled labour of the print industry, and could hire cheap, unskilled labour. Eventually, even the powerful trades unions cannot prevent the inevitable fall in wages, as seen with the defeat of the NUM, in the 1984-5 strike.
As Engels had put it,
“The history of these Unions is a long series of defeats of the working-men, interrupted by a few isolated victories. All these efforts naturally cannot alter the economic law according to which wages are determined by the relation between supply and demand in the labour market. Hence the Unions remain powerless against all great forces which influence this relation. In a commercial crisis the Union itself must reduce wages or dissolve wholly; and in a time of considerable increase in the demand for labour, it cannot fix the rate of wages higher than would be reached spontaneously by the competition of the capitalists among themselves.”
In fact, 1985 also represents the peak of that Innovation Cycle, during which all of the base technologies, used in the subsequent period, were developed. All of the development since then has been essentially built on them, and improvements and extensions of those base technologies, i.e. faster, more powerful chips and so on, new applications of chips etc. The consequence was that it again became possible to expand absolute surplus value, as reductions in the individual working-day/week/year/life could now be reversed, and, as Marx describes, although relatively less labour is employed, i.e. relative to output, absolutely more labour is employed, so that both more value, and more surplus value is produced. More labour is employed as a result of the increased individual working-day, and because population increases continue to provide additional labour supplies. That means that both employment and unemployment can increase simultaneously.
This creates the conditions for an increase in produced surplus value, but, as Marx describes in Capital III, Chapter 15, that is only half of the process. The other half consists in being able to realise the surplus value that has been produced. In fact, in reducing wages, this half of the process is complicated, because, the working-class, which now comprises the vast bulk of society, and so of consumers, is placed in a more difficult position, as far as its consumption is concerned. However, there are other factors. Firstly, part of the problem for capital, in the previous period, was that, as wages and living standards rose, the working-class, taken as a whole, was able to accrue savings, either in the form of money, or assets. Some of the higher wages went to buy more wage goods, and some to buy what had previously been luxury goods, developed on behalf of, first, the rich, and then the middle class, such as foreign holidays, cars and so on. But, there was a limit to such spending. Workers, at least individually, were not going to buy their own yacht, for example, though they might collectively go on a cruise for a holiday.
Instead, where, previously, the large majority of workers rented accommodation, in the post-war period, the majority had become owner-occupiers, even if only by taking out mortgages to do so. But, as wages rose, during the 1950's and 60's, the mortgage payments fell, in real terms. From the mid 1960's, as profits began to be squeezed, but capital needed to invest to capture rising demand, it needed to borrow more, in relative terms, causing interest rates to rise. Rising interest rates meant that workers could earn more on their savings. It also meant that the capitalised value of assets such as shares, bonds, and land/property fell, in inflation adjusted terms. So, workers were put in a better position to continue to buy their own house, or even to put money into mutual funds, pension schemes and so on. It was a period, when money-capital, thereby, appreciated, in terms of those assets, and so workers via company pension schemes could begin to accrue for themselves such assets at the expense of the private capitalists, even though, when they did, control over those assets still remained in the hands of the capitalists representatives, via the banks and financial institutions that managed those funds.
The fall in wages, from the 1980's onwards, therefore, was not a total loss for capital in terms of consumption of wage goods, because, in the previous period, not all wages had been used for such consumption. A fall in wages, then, does not result in a corresponding fall in consumption of wage goods, but first of all in a fall in workers savings, and their ability to buy up assets, assets that previously had been the sole preserve of the private capitalist, and which form the basis of their wealth and power in society. Consumption did not fall proportionate to this fall in wages, for other reasons. Firstly, although workers form the vast majority of consumers, their proportion of consumption itself is less than the proportion of society they represent. That is because, capitalists and others who live off surplus value, absorb a hugely disproportionate amount of societies' revenue. When wages fall, and profits rise, capitalists, money lenders, landlords and the state obtain larger revenues, which they can use for unproductive consumption. It means that demand for those types of commodities then rises, and, relatively, production moves away from wage goods towards the production of these luxury goods, and so on.
Secondly, because workers had built up savings in the previous period, in order to maintain their level of consumption, they run down these savings. That can come from simply using savings in deposit accounts, to cashing in mutual funds, life insurance policies and so on, or else from using houses as collateral against borrowing, via equity release schemes and so on. In other words, workers are, thereby, forced to convert capital/wealth into revenue, in the same way Marx described previously. Thirdly, the increase in productivity means that the value of commodities, including wage goods, falls. So, although wages fall, they buy more wage goods. So, for example, suppose workers collectively were paid £100 billion in wages. They produce 10 billion units of commodities, with a value of £1 trillion. The workers consume 1 billion units of what they produce. Now productivity doubles. 20 billion units are produced with a value of £1 trillion, the value of each unit is halved. Wages fall to £60 billion, but now buy 1.2 billion units, representing a 20% increase in consumption. But, the surplus product is now 18.8 billion units, and surplus value is £940 billion, rather than £900 billion. Because, wages are sticky downwards, rather than nominal wages falling in this way, central banks print money tokens so as to create price inflation. So, by doubling the amount of money tokens in circulation, money wages would rise to £120 billion, whilst the total prices of output would rise to £2 trillion. Money profits would rise to £1.88 trillion.
Fourthly, as Marx sets out against Sismondi and others, consumption is not the only form of expenditure in the economy, and revenues are not the only source of demand. The largest and increasing element of expenditure is that required to simply replace all of the consumed materials, and wear and tear of fixed capital, used in production. This expenditure does not come from revenues, but from capital. It is the same as the farmer who replaces their seed from their current output, not from their revenue required for consumption. As productivity rises, and so more material is processed, so an increasing proportion of output is consumed productively in its replacement.
During the 1980's and 1990's, therefore, gross output expands, though at a slower pace than in the previous periods, but net output expands more quickly. In other words, the surplus product and surplus value rises relative to output, and the rate of profit rises along with it. This rise in the rate of profit is fuelled by other factors deriving from the rise in productivity. Firstly, rising productivity reduces the unit value of materials. Secondly, it reduces the value of fixed capital. Thirdly, the rise in productivity is a result of technological innovation, and that means that all existing fixed capital suffers a major moral depreciation. New machines not only mean that 1 worker can replace 3 or 4 workers, but also means that 1 machine replaces three or four existing machines. As Marx describes, the new machine may or may not be nominally more expensive than the machines it replaces, but, in replacing several of them, it is always relatively cheaper.
So, this cheapening of both fixed and circulating constant capital, brings about a rise in the rate of profit. It also creates a release of capital, which is now converted into revenue, which can be used for consumption or additional accumulation. But, the rise in productivity also means that the turnover time for capital is reduced. That arises from a number of factors. Firstly, the working period is a function of a minimum size of output for sending to market. Whatever that minimum for any industry, a rise in productivity means that it is achieved in less time, reducing the working period. Secondly, rising productivity improves transport and communications, so that the circulation time required is reduced. Reducing turnover time, and so increasing the rate of turnover of capital, means that any given amount of advanced capital now sets in motion a larger quantity of productive-capital, and creates additional surplus value. It, thereby, brings about a higher annual rate of profit, even though it also results in smaller profit margins, as the larger mass of profit is spread across a much larger volume of output.
This is what creates the conditions in which interest rates began their long decline in the 1980's, as rising annual rates of profit, and masses of profit exceed the rate of capital expansion. The supply of money-capital from realised profits grows faster than the demand for money-capital to finance accumulation, causing interest rates to fall. Falling interest rates, along with rising profits, which make possible larger dividends, causes asset prices to rise. These are always the conditions in which gambling and speculation are encouraged. In Part 5, I will look at the consequences of that speculation and gambling, and how it created the conditions of the asset price bubbles we now have, and why and how they must burst.
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