How Liquidity Flows From Asset Markets Into The Real Economy - Part 5 of 17

Marx and Engels make the same point about, the purchase of bonds and shares. A company sells shares, and a money lending-capitalist buys the shares. The latter no longer has this money in their bank account, available to use for consumption. However, the company that sold them the shares, now does have the money in their bank account, and they use the money to buy productive-capital. So, this is money that appeared to move from the real economy for personal consumption into the fictitious economy, in the purchase of shares as an asset, but, in reality, simply transfers the money into different hands, where it is used to fund, not personal, but productive consumption. Its not liquidity escaping from the system, but it being transferred from one place to another.

Again, here, the shareholder/bondholder obtains dividends/interest on the money they have loaned to the company, and this revenue is a drain from the surplus value produced, rather than being available for capital accumulation. This is, again, simply a result of the money-lending capitalist/shareholders/bondholders being parasitic and having no social function, unlike the social role of the functioning capitalist in organising production, in the way that a conductor organises an orchestra.

Of course, the private capitalists, who were functioning capitalists, appropriated far more than was due to them as wages for that function, but capitalist development, itself resolved that situation, because, as capital expanded, and the private capitalist could not continue to perform that function, it was transferred to professional managers paid wages. And, when the continued accumulation of capital resulted in socialised capital supplanting private capital, the private capitalists were removed entirely from that social role, to become purely money lenders, where their parasitic nature becomes clear. The functioning capitalist, then, becomes the day to day manager, drawn from the working-class, and paid wages, also to be distinguished from the top level of executives, whose role is not to look after the interests of the business, but to look after the needs of the shareholders, and, as in the case of, for example, Enron and Tyco, even, simply, to look after their own immediate personal interests.

So, it appears, then, that there should be no leakage of liquidity from the economy, and the only consequence should be a reduction in the scale of economic expansion, as a result of an increased level of unproductive consumption by parasitic elements, as against productive consumption. As I have set out above, that alone, however, was not inconsiderable, as higher rents and pension costs meant that huge sums were actually deducted from surplus value, and, so, from potential capital accumulation, and the expansion of the economy.

That was hidden, because the 1980's and 1990's were a period of long wave downtrend, in which economic expansion was slower than normal, because capital investment took the form of intensive accumulation, and the replacement of old fixed capital by new, more efficient fixed capital, rather than its quantitative expansion. Productivity rose sharply, the volume of profit increased, as a result of the rise in the rate of profit brought about by this technological revolution of the 1970's and 80's, and that was more than sufficient to cover the supply of money-capital required to finance this investment, leading to falling interest rates, which, in turn, were the driver, at that time, of rising asset prices.

However, there is a more significant point about why this argument put by Marx and Engels, about the liquidity not escaping, whilst true, generally, is not true at specific times, and those times are when asset price bubbles are being inflated. Marx and Engels describe it, themselves, in relation to the financial crisis that erupted in 1847. As they point out, at that time, there was a financial bubble inflated in the stock market, as the price of railway shares soared, in a similar manner to the bubble in technology shares in the late 1990's. As Engels sets out, private capitalists used profits from their own companies, not to invest in additional capital, but to buy railway shares, in the hope of making large capital gains. Not only did they use profits for that purpose, but they also borrowed money to do so too, as interest rates were low, following the boom and huge expansion of profits after the Opium Wars, and the opening up of vast new markets for British manufactures in China.

Instead of money from realised profits being returned to the circuit of industrial capital, to finance the accumulation of industrial capital (M` - Bank Deposits - M), or to finance unproductive consumption by capitalists an other parasitic elements (M` - Bank Deposits - C`), it can go to buy existing shares, bonds and other assets, inflating their prices, as Engels describes in relation to the Railway share bubble of 1847.

So, its clear, here, that money was actually draining from the real economy into the purchase of these shares, and the more the price of the shares rose, the more money from the real economy was drained to cover their purchase, because these were not all new shares sold to cover additional capital investment. This was increased demand for existing shares, which simply inflated their prices. Its true that, in order for someone to buy the shares, someone had to sell them, and so they obtained the money in their bank account, instead, but, in a period of speculative frenzy, this simply means that they may then use this money to buy other existing shares, which they fancy might be the next ones to soar in price, or they may buy bonds, property or some other asset. It does not lead to the money leaving the sphere of assets, and re-entering the real economy.

Its like, in the example above, if the former landowner, uses the £1 million received from the farmer, to lend back to the farmer, but the farmer, instead of using this money to buy productive-capital, uses it to buy another 1,000 hectares, from some other landowner, and, in the process, by increasing this monetary demand for land, also causes land prices to rise. The consequence is they would see a capital gain on their first land purchase, and feel they had avoided paying a higher price for the next. Or, alternatively, they might use the money to buy bonds, or shares, if they see these asset prices rising rapidly, offering them the potential of significant capital gains. Periods of speculation always mean that someone sees the potential for further rises in some other asset class, at least greater than that for the assets they own, and those assets might be esoteric things like tulip bulbs, wine, art, or vinyl records.

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