Distribution and Demand

In an article in Moneyweek, John Stepek writes,

“As a consumer, if your electricity bill goes up (and I’m sure we’re all only too aware that this is exactly what’s about to happen for most of us in the UK) then you have to either cut back elsewhere, or you have to ask your employer to increase your wages, in which case the money comes out of your employer’s profits (and thus decreases the amount going to shareholders).”

His point is that rising energy prices act like a rise in interest rates, or in taxes that reduce disposable income, and so reduce demand, which has a contractionary impact on economic activity. But, what this fails to take into account is the different effect of a drop in wages, as against a drop in dividends/interest payments.

The whole perspective of the speculators who have seen rising energy and food prices, along with rising interest rates and taxes acting to reduce disposable income is that it results in this fall in demand, leading to a fall in economic activity, and so reduces the pressure on the demand for labour, causing wages to fall, and on the demand for capital so causing interest rates to fall, and so making it possible for asset prices to rise once more. Its what has led to stock and bond markets rising sharply in the last couple of days following US GDP data. In fact, as I wrote earlier, that GDP data does not at all show what it is being presented as showing, and that was illustrated further by the US data on wages, spending and inflation released this afternoon.

The latest US data shows wages continuing to rise, along with household spending. In fact, wages are rising fastest for the lowest paid workers, and that is significant, because the marginal propensity to consume is higher for lower paid workers than it is for higher paid workers, who tend to save a greater proportion of income, just as the marginal propensity to consume is higher for workers, in total, compared to the bourgeoisie that saves a much larger proportion of income, and, more importantly, uses a large portion to gamble on stock, bond and property markets.

As Marx notes,

“The conditions of direct exploitation, and those of realising it, are not identical. They diverge not only in place and time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production and the consumer power of society. But this last-named is not determined either by the absolute productive power, or by the absolute consumer power, but by the consumer power based on antagonistic conditions of distribution, which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits. It is furthermore restricted by the tendency to accumulate, the drive to expand capital and produce surplus-value on an extended scale. This is law for capitalist production, imposed by incessant revolutions in the methods of production themselves, by the depreciation of existing capital always bound up with them, by the general competitive struggle and the need to improve production and expand its scale merely as a means of self-preservation and under penalty of ruin. The market must, therefore, be continually extended, so that its interrelations and the conditions regulating them assume more and more the form of a natural law working independently of the producer, and become ever more uncontrollable.”

(Capital III, Chapter 15)

So, Stepek is quite right to note that, in response to rising energy, food and other prices, workers can, and indeed, as the mass of strikes across the globe demonstrates, are demanding higher wages. With those higher wages, which again today's US data indicates, workers can, then continue to demand goods and services as before, so that capital must, in turn, continue to accumulate additional capital, because, as Marx notes, as a result of competition, this “drive to expand capital and produce surplus-value on an extended scale. This is law for capitalist production, imposed by incessant revolutions in the methods of production themselves, by the depreciation of existing capital always bound up with them, by the general competitive struggle and the need to improve production and expand its scale merely as a means of self-preservation and under penalty of ruin.”

The flip side of this, as Stepek also notes, is that, in paying higher wages, profits are reduced, but because this “law for capitalist production” of the need to accumulate, under the whip of competition, as rising wages drives rising demand for wage goods, the other consequence, as Stepek says, is that less of that profit is available to pay out as interest/dividends. But, then the question is what were those interest/dividends used for? It is, of course, the case that some of them are used to fund the consumption of their recipients. The tacit assumption of Stepek is that they go to normal households, including as pensions and so on, and so have much the same effect as changes in wages, but that is far from the truth. The largest amounts go to the ruling class, providing them with vast revenues, far in excess of what they can use, even for their most extravagant lifestyles.

The consequence is that vast amounts of those revenues from dividends/interest – including those received by investment banks, pension fund managers etc. - then goes into further gambling on stock, bond and property markets, and, again, not to buy new stocks and bonds, but simply to bid up the prices of existing assets. As a consequence none of that goes into financing additional capital accumulation, and so increased economic activity. It is like a farmer, who finds that the price of the land they intended to buy has risen from £1 million to £2 million, leaving them with £1 million less to actually advance as capital to buy machines, seed, labour-power and so on, and so which acts to reduce economic activity.

Marx is quite right that for real capital, the drive of competition and the need for capital accumulation, continues to operate, but that is not at all true for shareholders and bondholders, i.e. fictitious capital. They are interested only in maximising their payment of interest/dividends, and, now, with maximising the amount of capital gain they can obtain from a rising price of their assets. That requires, if possible, that a smaller proportion of profits go to capital accumulation, so that a larger proportion goes to their interest/dividends, to buying back shares so as to inflate their prices and so on. It is why these speculators are desperate for a recession, for a slackening of demand, and of the competition that arises from it, which forces the companies in which they hold shares to have to accumulate additional capital from profits.

For the last 30 years and more, those shareholders have been able to draw an increasing proportion of profits as dividends/interest, at the same time that interest rates fell, causing asset prices to rise, and more and more revenues drawn into speculation in those assets, rather than into stimulating aggregate demand for goods and services. With workers in a weak bargaining position, profits continued to rise, but instead of going into additional consumption, or into financing additional capital accumulation, it went into speculation, driving up share, bond and property prices, in a never ending spiral. Indeed, it sucked workers into it as well, as they used any surplus income to also engage in such speculation.

But, rising wages, feeding into increased demand for wage goods and services, now reverses that condition. It starts to at least restrict the growth of profits if not yet to squeeze them. It means that a larger proportion of those profits must now go to capital accumulation, driven on by “law”, by the competition between firms, for fear of “ruin”, if they do not. A smaller proportion goes to interest/dividends, but, as the demand for this capital rises, at the same time that the supply of it from profits falls, so the inevitable result is higher interest rates. Higher interest rates, can only, then, be manifest, in the form of falling asset prices. In other words, a firm might pay, £0.80 dividend on a share, rather than £1 previously, but the fact that the price of the share has fallen from £10 to £5, means that this represents a yield of 16%, as against the yield of 10% previously.

But, now, this sharp drop in asset prices means that the urge created over the last 30 years or so, to engage in this speculation, itself is ended. Those in receipt of these revenues no longer use them simply to bid up the prices of shares, bonds and property. As their income falls, the portion they previously spent on consumption hardly budges, as they seek to maintain their extravagant lifestyle, whilst the rising wages of workers does lead to rising consumption, stimulating further demand. Instead of seeking capital gains from inflating asset prices, in conditions where asset prices are instead falling, the owners of loanable money-capital, instead seek revenues from it, including using it to finance additional capital accumulation, and an increase in production, so that the result is an increase in both personal and productive consumption.

The speculators have failed to recognise that material conditions have fundamentally changed. Its not only that the demand for labour itself has risen to a point at which firms compete against each other for labour, bidding up wages, but that, sensing this change, workers themselves are demanding wage rises, strengthening their organisations, and being confident to assert their interests. Rising prices for food and energy and so on are not going to force workers to accept a cut in their living standards, but will simply be passed on into higher wages, enabling consumption to be maintained and extended. The consequence will be a constraint on profits, felt in a squeeze on dividends/interest, leading to a crash in asset prices, bringing to an end the period of madness of asset price inflation, and speculation of the last 30 years.

As profits are squeezed by rising wages, central banks will seek to enable firms to raise prices to protect profits, and the natural extension of commercial credit between firms will facilitate that, whatever central banks do. So prices will continue to rise, preventing central banks from being able to pause their hikes in policy rates, but as the demand for capital rises faster than its supply, so those increased policy rates will only tail the secular rise in market rates of interest that must result from the increased demand for capital. Inflation is here to stay for some time, and so are rises in interest rates, and a prolonged fall in asset prices.