So, now, how is this process reversed, and liquidity released from the sphere of assets into the real economy? It cannot simply arise from a general fall in asset prices, which is, itself, the effect rather than the cause. Asset price bubbles stop inflating because the number of buyers stops exceeding the number of sellers, and, as is the nature of all bubbles, such a condition rapidly leads to a sharp increase in the number of sellers, and sharp decrease in the number of buyers, leading to the bubble bursting. But, even this cannot explain how this results in liquidity, tied up in assets, washing into the real economy.
Take the situation of house prices, and two buyers and sellers, A and B. Both have houses with a current price of £100,000. If each decide they prefer the others house (A prefers the use value provided by B's house and vice versa, so an exchange increases the welfare of both), they could exchange on this basis. This is like products of equal value exchanging for other products of equal value, in a condition of barter, as described by Marx in Theories of Surplus Value. Here, commodities are bought with commodities. But, no change, then, arises if the price of both houses is £200,000, or conversely, if the price is £50,000. It is the difference between money as measure of value/unit of account, and money as means of circulation. The price of the houses is an “ideal price”, but no money is required to effect the exchange, i.e. as means of circulation. Both parties could put whatever identical price tickets on the houses they liked.
This also highlights the delusion of all those convinced that, because the price of their house has risen, they have somehow become wealthier. For so long as this additional “wealth” remains tied up in the house (whose use value remains exactly as it was before), it is only an increased paper or notional wealth, of no use to them whatsoever. They could use it as additional collateral, in order to borrow more, but the additional borrowing means a reduction in wealth, not an increase, not to mention an increase in costs, in the form of interest on the borrowing, thereby, not only reducing wealth (stock of assets), but also affluence (flow of revenue). If they realise the capital gain by selling the house, they are faced with the question of where to live, unlike the seller of shares or bonds, for instance. And, now, they find that the price of the house they seek to buy has also risen wiping out the paper capital gain.
The “ideal price” of commodities is determined by the amount of universal labour they represent, as measured by money/standard of prices. That price moves up or down dependent upon the amount of universal labour required for their production, on the one hand, and the value of money/standard of price, on the other. Market prices, however, depend also upon the relation of demand and supply, causing a fluctuation around this ideal price, or, under capitalism, the price of production. If market prices of commodities exceed this ideal price/price of production for any length of time, then producers of these commodities, will make surplus profits, inducing them to increase supply, so as to make more of that profit, and capture more of the increased demand, or else, new producers will enter this sphere, in search of these surplus profits. Supply will rise, and market prices will fall to the ideal price/price of production.
But assets are distinguished from commodities by the fact that their supply cannot be increased in this way, and increased supply is not induced by surplus profits. Assets may be bought and sold as commodities, but they are not like other commodities that are produced by labour, and which, therefore, have value. The most obvious example is land. Land is not produced by labour, and so has no value. Yet, land is bought and sold as a commodity and has a price. It is bought and sold as a commodity, because it is a use value, necessary in production, as a surface upon which buildings are erected, as instrument of labour for the production of agricultural products, as means of production, for agricultural products, and as the source of minerals. It has a price, despite having no value, precisely because this use value is in limited supply, and cannot be increased, so that its owners can charge a rent for it. The price of land is only the capitalised value of this rent. If land could be increased in supply, in the same way that ice-cream, or any other commodity, can be increased, its price would fall to zero.
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