Economies Are Not Overheating

The narrative from bourgeois economists and speculators is that developed economies are overheating. That is that aggregate demand is exceeding aggregate supply, and this is the cause of rising prices. Its bunk. The general level of prices can no more be explained by supply and demand than can the price of any individual commodity.  Even if supply and demand were in balance, prices would be rising, because the measure of those prices, the standard of prices/currencies, has been significantly reduced in value, as a result of QE and excessive liquidity injections. Measure anything with a smaller measuring stick and you get a higher number!  Moreover, they do not examine why it is that aggregate supply has not been rising quickly enough.

When bourgeois economists talk of economies overheating, what they mean is the same thing that Marx means when he talks about an overproduction of capital. In other words, they mean that the economy/capital is growing at a pace in which the reservoirs of surplus labour are being used up. Capital always requires that the aggregate supply of labour is greater than the aggregate demand for it, so that workers have to compete with each other for available employment. That means they have to sell their labour-power – the only commodity they have to sell – at a price that is significantly below the amount of new value they create by the employment of that labour-power. That is the source of surplus value, which is converted, in the sale of commodities into profit, which is then divided into rent, interest, taxes and profit of enterprise.

When that excess supply of labour-power starts to get used, the competition between workers for jobs is reduced, whilst the competition between firms to get their hands on available workers increases, so the price of labour-power/wages rises, and the amount left over as surplus value, and so for rent, interest, taxes and profit of enterprise is reduced. As Marx sets out, in Capital III, Chapter 15, and in Theories of Surplus Value, Chapter 21, if this process continues, wages rise to a level at which any further expansion means that capital cannot act as capital, because it is unable to produce any additional surplus value (wages rise to a level greater than the new value created), and even may reduce the existing amount of surplus value. It is a crisis of overproduction of capital.

That is not the condition that developed economies currently face. The current conditions are those that capital faced in the late 1950's/early 1960's, in which, yes, the reservoirs of surplus labour that were built up during the 1980's and 90's, have been significantly diminished, if not entirely used up, so that workers are increasingly under less pressure to compete against each other for available work, by taking lower wages, accepting worse conditions, greater precarity and so on, and firms, especially in specific areas, are forced to compete with each other for the available labour, by having to pay higher wages, but that is not at all, yet, the condition that existed in the 1970's, in which capital is facing a crisis of overproduction.

What it is is a condition in which, particularly in specific industries, and specific locations, capital is having to pay higher wages, and that impacts its ability to increase its profits. But, an inability to further increase profits at the same rate, is not the same thing as not increasing profits themselves, let alone, having those profits reduced, or turned into losses. A look at developed economies shows not only are rates of profit still high, but the amounts of profits being reported by firms, in aggregate continue to grow considerably.

US Corporate Profits

One reason for that is that the economic expansion means additional sales of goods and services, and, so long as the quantity sold rises by more than any fall in the profit margin/rate of profit, the total profit will rise. In other words, a firm that sells 1,000 units with a profit margin of £0.10, per unit, makes £100 profit, but if it sells 2,000 units, with a profit margin of only £0.08, its total profit will still rise to £160, a 60% increase, despite the 20% drop in its rate of profit. As I have set out elsewhere, this also understates the annual rate of profit, which is also affected by the rate of turnover of capital, which rises over time in line with rising productivity, and means that the annual rate of profit is many times larger than the rate of profit/profit margin.

The other reason is that, because central banks have increased liquidity to enable firms to increase prices, so as to recoup increased wage and other costs, the nominal value of sales has risen, as well as the volume, and that is reflected in higher nominal profits. It doesn't change the underlying value relations, and effect on profitability, but it does disguise it for a while, at the expense of setting in place a price-wage spiral, because as nominal prices rise, so as to protect nominal profits, so the price of wage goods rises, causing the value of labour-power to rise, which, especially in these conditions of a relative shortage of labour, is quickly translated into higher nominal wages, which again, then impacts profits and so on.

What the bourgeois economists and speculators really mean by overheating, currently, is that the condition they enjoyed for the last 30 years, in which they could continue to increase profits at a rapid rate, at the expense of wages, has come to an end. They are only able to do that, now, by continuing to inject excess liquidity into economies/inflation, and that, in itself threatens to destabilise the system. Only if they could prevent workers from protecting themselves against the higher prices, by raising their wages, could they stop that, hence the calls by Larry Summers for millions of workers to be thrown on to the dole, and the demands of politicians for workers to moderate pay demands, and action of governments to force real wage cuts on their employees, even as they face massive shortages of workers, because they can't recruit them, on the existing low wages.

But, an indication that we are not in a crisis of overproduction of capital can be seen not only in the fact that rates of profit remain high, and total profits continue to grow significantly. That is from the fact that firms are not yet feeling the need to use their profits to expand their business, rather than continuing not only to pay significant dividends, but also to use profits to buy back shares, so as to boost share prices, as well as transferring capital to shareholders by other means. In the conditions of a crisis of overproduction of capital, the economy expands rapidly, and firms under pressure of competition to grab their share of this market, use their profits to accumulate additional capital, particularly circulating capital. As a result, they throw less of these profits into the money markets, causing the supply of money-capital to fall, and interest rates to rise. That causes asset prices to drop. Although we saw an up to 40% drop in some share price indices last year, as interest rates began to rise, a large part of that was reversed, earlier this year, as central banks continued to inject liquidity, and so nominal profits continued to rise.

One reason that asset prices fall, is that, in order to expand, particularly to acquire additional fixed capital, in the shape of new buildings, and machinery, firms are led to borrow money-capital, by issuing new shares and bonds, and this increased supply reduces their price. Particularly, with the need to use profits to finance expansion rather than pay dividends, higher yields can only be obtained if the price of the assets fall. One reason that supply of goods and services has not expanded as fast as monetary demand is that firms have, so far, attempted to continue as they have for the last 30 years, using profits to buy back shares, and hand dividends to shareholders, so as to keep asset prices inflated, rather than investing in additional fixed capital to raise productivity. They have employed more labour, and largely financed it from an extension of commercial credit.

They hope to continue doing that, but material conditions have changed, making it impossible. Britain is particularly affected, because of Brexit, which makes it harder to get the labour required. But, the EU also suffers, though to a lesser degree, because it is not truly a single market. A real single market requires that labour is able to move within it without any frictions, but that also requires that workers be able to obtain the same pensions and benefits, wherever they live or move to within it. That would require a single fiscal regime in the EU, so that harmonised pensions and benefits were paid out of a central fund.

In Britain, the EU, and US, as elsewhere, another restriction is the astronomical rise in property prices, alongside a shortage of secure rented accommodation. To be able to move to available, or higher paid work in a different location, its necessary to be able to sell the house you own, quickly, and be able to buy an equivalent house at around the same price in the location you wish to move to. None of that exists, as a result of speculation in property having driven prices higher. The EU is stopping its Golden Visa systems (whereby you get a visa allowing you to work if you buy a property whose price is over €500,000) because it is driving up these property prices.  Not, only is the process of selling a house protracted, but the ability to buy an equivalent house for about the same price, elsewhere, does not exist, because, as house prices have soared, so the absolute differences in price of houses in different areas has also widened massively. There is no point in moving to a job that pays you 20% more, in a different location, if, to buy a house there, will cost you twice as much as your current house.

And, the same thing applies with rental accommodation. There is no guarantee of being able to obtain secure rental accommodation, at a reasonable rent, if you move to another location. Here, in North Staffordshire, you hear many Welsh, Scottish and Geordie voices, mixed in with the local dialect, and that is because, in the decades after WWII, many miners, from those other areas, moved to employment in local collieries, and were provided with rental properties in NCB owned, miners houses. Large numbers of local authority houses were also built, and provided secure tenancies for workers moving into the area, as well as for locals, but no such provision exists today, with existing social housing in severe short supply, and usually only available to the homeless, or those in severe hardship.

Addressing those housing problems would facilitate a freer movement of labour, just as reversing Brexit, and establishing a real single market for labour in the EU, would reduce existing frictions, making it easier for labour to move to where its needed. But, that is a project that will require several years to achieve. But, there are other sources of available labour that means that there is no real overheating or shortage of labour, to an extent that results in overheating. As large scale capital has continued to use its large and growing profits to pay out dividends, and buy back shares, rather than expand production, so smaller capitals have filled the void in the market. But, these smaller capitals are inefficient, hence the low levels of productivity growth in developed economies.

Some of these smaller capitals will become bigger, more efficient capitals by taking over their competitors, and in the process, they will become more productive, by enjoying economies of scale, and shedding labour. The current data showing the number of jobs exceeding the number of workers available to fill them, is, then, misleading, because a lot of those jobs, and of the available workers is tied up in these small inefficient businesses, and zombie companies, some of which will also go under as interest rates and wages rise. Much as with the process of expelling labour from the land, in the 19th century, that moved to the towns, this process will also provide a continued supply of labour-power.

Large firms themselves will have to also begin to invest in additional production, and that becomes more attractive as asset prices continue to fall, bringing an end to the neoliberal model that existed for the last 30 years, in which the ruling class looked to speculative capital gains from appreciating asset prices, comes to an end, and they have to look again to revenues produced by the investment of real capital in production. But, these large firms are far more efficient than small firms, and so as they increase that production, they will do so without the need to employ the same levels of labour that the smaller capitals do.

In short, we are not going back to a relative surplus population as existed from the 1980's, but nor are we facing a severe and persistent shortage of labour, causing profits and the rate of profit to fall sharply either. That is another ten years or more in the future. As in the 1960's, it is a process that develops over time, and reinforces itself, before resulting in a crisis of overproduction of capital.