Quarterly results from companies, around the globe, seem to be confirming the view I have put forward for the last year. That is that, as the global economy escapes the idiocy of lockdowns, there would be a rapid growth of sales/gross output, combined with a squeeze on profits/net output, and that the pattern of demand established during the lockdowns (inside spending) would change, and see an increase in demand for other goods and services (outside spending) that consumers had been denied during the lockdowns.
For Marxists, revenues comprise wages, profits, rents, interest and taxes, and so are equal to the new value created by labour during the current year (v + s), which is mostly used for consumption, but a part of which can also be used for capital accumulation. It is what constitutes National Income, and whose equivalent in production is GDP, i.e. final consumption plus capital accumulation. It is not the same as total output, which comprises not just the new value created during the year, but also the value of constant capital (raw materials, wear and tear of fixed capital) produced in previous years, and merely transferred to the value of current production (c + v + s).
But, for company accounts, revenues means total sales. Most company reports show these revenues rising faster than had been expected, as global demand rises following the lifting of lockdowns. Where that is not the case, it is where companies had been enjoying large sales during those lockdowns, which is primarily amongst tech companies who benefited from the fact that workers were working from home, and so required all of the software to enable that, as well as upgraded hardware, broadband and so on, as well as spending more money on computer games, as well as downloading more porn, films and so on. Also, businesses like Wal-Mart that sold commodities that could be used for leisure and entertainment, in the home, saw sales of those things rise. A clear example of that was Peloton, but there are also lots of reports of increased sales of marijuana, and sex toys.
As lockdowns have ended, these sales have dropped sharply, as people were liberated from their incarceration, and able to go out, and do all those things they were prevented from doing for two years. Peloton sales crashed, leaving the company in financial difficulty as it had ramped up production of equipment it could not now sell, leaving it with a large amount of overproduced commodities to clear, now, at much reduced prices, meaning, in most cases, at a loss. Wal-Mart had that problem on a larger scale, having stocked up on all of those “inside” commodities, only to find it had surplus stocks, as the economy shifted to “outside” spending. Even for Wal-Mart, however, it appears that its actual sales and revenues are growing, but reflecting this shift in spending, and also a shift into commodities with lower profit margins.
The results from some tech companies like Microsoft, whose revenues grew by 12%, shows this same pattern, even though that 12% growth was below estimates. This continued growth in sales for companies is at odds with all of the talk about economic slowdown and recession, especially when combined with the continued strong growth of employment. Some companies whose businesses were heavily dependent upon those “inside” sales, during lockdowns, have suffered, especially where they acted as though those conditions would last forever, and ramped up production on that basis, but, overall, despite all of the talk of recession, it appears that demand for goods and services continues to rise, and particularly in respect of all of those “outside” goods and services. Demand for leisure and entertainment, for travel and so on, seems to be rising much faster than capacity to satisfy it. That is being reflected in last month's sharp rise in new capital goods orders, which rose by 1.9%, four times the estimate. What is being squeezed is profits.
That is so for several reasons. Firstly, as described in relation to Wal-Mart, a shift in consumption patterns from larger, higher priced durable goods, which turnover more slowly, to smaller, lower priced consumables, which turnover rapidly, means that profit margins are reduced, for the reason that Marx describes in Capital III. The average rate of profit, which determines prices of production, and the allocation of capital, is based upon the annual rate of profit. The faster capital turns over, the higher than annual rate of profit. So, to produce the same average annual rate of profit, the price of production, of firms with a high rate of turnover, must be lower than for those with a low rate of turnover, manifest in lower profit margins.
Secondly, those companies whose businesses were geared to the “inside” economy have suffered as demand has shifted, and they are left with inventory to clear at much lower prices. Thirdly, wages are rising, and although this doesn't, yet, appear in rising hourly wage rates that does not take into consideration a host of other payments being made to workers, as bonuses and other recruitment and retention payments, as well as increased overtime working and so on. That is before all of the rash of strikes across the globe does lead to much higher hourly wage rates. Finally, there is the much higher costs of constant capital. That results not only in a fall in the rate of profit, but also in what Marx calls a Tie-Up of Capital, which appears to reduce the actual amount of profit produced, even where the amount of surplus value produced remains constant. It explains why actual demand and sales are seen to be rising, and employment is growing, whilst GDP is seen to be rising slowly, or even falling.
Marx describes this tie-up of capital in Capital III, Chapter 6, and in more detail in Theories of Surplus Value, Chapter 22. GDP is a measure only of revenues (wages, profit, interest, rent and taxes), and so only of the new value created this year, but, when it comes to profit, as against the amount of surplus value produced by labour, it is an amount of realised profit, and that can be either increased as a result of a release of capital, or reduced as a result of a tie-up of capital. In the value of output, we have c + v + s. C is the value of constant capital (raw materials, wear and tear of fixed capital) produced in previous years, and consumed in this year's production. Its value is merely transferred to current output, just as the demand for its replacement comes from capital, and not from revenues, its value being replaced directly from current output.
If the value of national output is c 6,000 + v 1,500 + s 1,500 = 9,000, then GDP will equal 3,000, as will National Income, i.e. the total new value created this year is 3,000, equal to revenues (wages + profits), and also equal to GDP, i.e. the value of the consumption fund, or goods available for final consumption. The 6,000 of national output value comprising c, forms a revenue for no one, and so does not appear in either National Income or GDP data, and the demand for it comes directly from capital, not from revenues.
However, suppose, as Marx describes, during the year, the value of c rises, so that to replace it on a “like for like basis”, as Marx puts it in Capital III, Chapter 49, 6,600 is required. Although, the same amount of labour is employed, and the rate of surplus value remains the same, so that the same 1,500 of surplus value is produced, 600 of this surplus value, must now be used simply to replace the consumed constant capital. It will appear as though the actual amount of surplus value/profit produced is not 1,500, but is only 900. In total, therefore, it will appear that National Income/GDP has fallen from 3,000 to just 2,400, even though output and employment actually remains at the same level.
If we examine the situation in the following year, assuming no further changes, this becomes clear. Now, we would have, c 6,600 + v 1,500 + s 1,500 = 9,600, showing that, in fact, now, the total value of output has risen by 600, equal to the higher value of constant capital consumed in and replaced out of current output. But, National Income and GDP, would remain constant at 3,000. Now it is seen that the actual amount of surplus value/profit is unchanged, and that the previous reduction was only due to the tie-up of capital, not a change in surplus value/profit. What does change, however, is the rate of profit, even though the mass of profit remains unchanged. Initially, the rate of profit was 1500/7500 = 20%, but is now 1500/8100 = 18.52%, which is solely a consequence of the rise in the value of constant capital.
So, falls in GDP, are, in fact, quite consistent with rises in the value of output and employment, and also, of rising value of sales, where there is an increased value of constant capital as a component of it, and that can arise due to a change in actual commodity values, or simply in the market prices of those inputs. Either way a portion of the produced surplus value that would have gone to profits, has now been eaten up to pay for the replacement of constant capital, whereas previously it would have gone to either unproductive consumption, or capital accumulation. This is one reason why, during such periods gross output grows faster than net output, as profits begin to be squeezed from these different sources, i.e. rising wages, and rising prices for the replacement of constant capital causing a tie-up of capital, and falls in the rate of profit, as any given mass of profit now also accumulates a smaller quantity of additional capital.
That is why, most markedly in the US, we have seen sluggish GDP growth, and even declines, whilst companies continue to report rising sales volumes and revenues, and employment growth is at a rapid pace, faster than the natural increase in the workforce. Indeed, the fact that employment continues to grow rapidly, in this way, and that companies continue to see sales growth, as all of these additional workers with their additional wages spend them on goods and services, is why, despite those squeezed profits, companies continue to accumulate capital, and expand their output, because, a) if they don't their competitors will, and b) even though they may face smaller profit margins, and a lower rate of profit on their capital, the higher volume of sales and production means that their mass of profit continues to rise.
It is that, which is the cause of falling share prices, even though the mass of profit rises, because the fact that profits do not rise proportionate to output (laid-out capital, c + v), i.e. gross output rises relative to net output, means that, in conditions where competition drives each capital to have to accumulate capital, a greater proportion of that profit must go to that capital accumulation, leaving less to be paid out to shareholders as dividends, to bondholders as interest, and so on. It means that the demand for that money-capital to finance the expansion rises relative to the supply of that money-capital from realised profits, causing interest rates to rise. The rise in interest rates, can only, thereby, arise as a result of lower prices for shares and bonds, so that the interest/dividends paid out represents a higher yield.
The speculators are desperate for a recession in order that wages would begin to fall, along with the demand for capital, so that profits rise, and interest rates fall, so as to boost asset prices once more, but the data continues to defy their expectations. A look at the situation in China, currently, illustrates this, and what is going on perfectly. China's economy is in constant threat of overheating if allowed to operate normally. But, if it did, not only would wages rise sharply, but so would interest rates, and that would collapse its huge asset price bubbles, upon which the wealth of the ruling class is based. Already, we are seeing people in China start to stop paying their mortgages, as well as suppliers to property developers stopping supplies, as a payments crisis begins to unfold, and property prices start to fall. The huge property empire of Evergrande has collapsed. The Chinese Communist Party is trying to keep the entire illusion floating in mid air, by, on the one hand, imposing repeated lockdowns, so as to crater the economy, and prevent it overheating, and, at the same time, printing currency to pay out to paper over the cracks, and prevent immediate bankruptcies. In the process it is simply creating the conditions for an even bigger financial crash, and for a Chinese hyper inflation, as soon as it is forced to abandon the lockdowns.
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