The Resilience of UK Demand

Pundits continue to be surprised that demand in the UK economy remains strong, despite rapidly rising prices. That resilience, is not what the ruling class of speculators, or its representatives in the state and financial media want to see. They want to see at least a slow down, or even recession. In the US, Larry Summers has been open about wanting to see unemployment rise to over 5%. They hoped that high prices, particularly for things like energy would quickly soak up households' spending power, so that they would spend less on other goods and services, slowing the economy, once more, as fiscal austerity had been used to do, in the past, so that the pressure on the labour market would ease, wages would fall and profits rise, whilst, also, interest rates would fall, and boost the price of the financial assets that are now the form in which that ruling class owns its wealth. There are a number of reasons why their hopes have been dashed.

The pundits point to the fact that prices are rising by more than the rise in hourly wages, meaning that real wages are falling. That would suggest that workers have less money to spend, and so should reduce their consumption levels, slowing the economy. But, as I've set out before, there are a number of problems with this idea.

Firstly, if you think prices are going to rise, there is a good reason to bring your spending forward, on all those things you can buy, now, and which are durable, even if you consume them later. For example, you might buy in large amounts of tinned goods, now, consuming them over the next few months, or if you were going to be thinking about buying a washing machine, TV, or car, you might bring that decision forward a few months, to buy it, now, at today's lower prices. And, that doesn't apply just to households. It applies also to businesses, especially, given that, as a result of a combination of Brexit, lockdowns, and so on, supply chains became dislocated, and so firms need to hold larger inventories than they did previously, to ensure continuous production.

With rising interest rates and falling house prices, where households might reduce demand is for property, which has been seen, both because they may find they can't afford properties at their currrent prices, and because, as property prices fall, there is a clear incentive to wait for them to fall further, so as to buy at those lower prices. That process is at an early stage, but it means that there is still a lot of money in the possession of households that might have gone to house purchase that is now available to fund other types of consumption. The pundits tend to associate lower property and asset prices, with a negative wealth effect, causing consumption to fall, but, as set out above, and as I have described elsewhere, in looking at how liquidity flows from assets into the real economy, in reality, when asset prices fall, it creates a release of capital and revenue available for consumption, both personal and productive.

Lower land prices means farmers or builders have a release of capital to be used to employ more workers, machines and so on. Lower share and bond prices, mean pension funds can buy more of these assets to fund future pension liabilities, meaning firms have to use less of their profits, and workers less of their wages, to fund pensions, leaving more profits and wages for consumption, both personal and productive, and so on. The higher interest rates that have gone along with higher inflation, have brought about that shift from assets to consumption, but its still at an early stage.

Secondly, although prices are rising faster than hourly wages that doesn't mean that household incomes are rising slower than household expenditure. There are a whole series of reasons for that. The rise in hourly wages does not, for example, take into account the payment of numerous other bonuses, allowances and so on. In the 1990's, local councils found that they could not retain or recruit a number of types of workers such as environmental health officers. However, they were restricted in being able to raise wages. What they did was to introduce a number of other incentives, such as the provision of lease cars, on favourable terms, to employees in those jobs.

As firms have found difficulty in retaining and recruiting workers following the ending of lockdowns, there have been a plethora of signing on bonuses and other such ad hoc payments, and non-wage benefits that contribute to incomes. In the current wage bargaining rounds, we have seen nurses offered a one-off lump sum pay rise, in addition to the smaller increments to hourly wages, for example. The purpose of these payments, is also not just to recruit and retain workers in those spheres.  By massaging the hourly earnings figures in a lower direction, it adds to the ruling class propaganda that workers are still in a weak bargaining position, that wages are failing to keep up with prices, and so on, and so presses down on all other negotiations. The advantage, then, also of the one-off payments, such as that offered to nurses, is that the employer can try to ensure that, in future negotiations, it, indeed, is not integrated into the wages of the workers.

There is another reason why the hourly wage data doesn't reflect the position of household incomes, and that is a compositional effect. If we take the wages of a series of types of workers, such as brickies, bakers, bus drivers and bin men, it may well be that the hourly wages of each of these groups of workers rises by say 5%, but suppose we take a series of other types of workers such as cleaners, cooks, care workers and cab drivers, whose hourly wages also rise by 5%, does this mean that household incomes from all these workers rise by an average of 5%? The answer is no, because it depends on the absolute level of wages of each group, and the number of people employed in it. Suppose the average hourly wage of the first group is £10, and of the second group £8. If 20% of the workers in the second group, get jobs in the first group, then their hourly wage will rise, not by 5%, but by 25%!

Given that, with an increasing shortage of labour, workers have been able to move to better paid jobs, the rise in the hourly wage for different types of jobs, becomes a distraction and distortion. And, indeed, as I've set out before, the average increase in wages for someone simply moving jobs, is around 14%. That clearly does not apply to the whole workforce, who do not move to better jobs, and who remain in their same job, but for a sizeable proportion of the workforce, it is the case, and represents a significant increase in income, over and above inflation, and so income available for additional consumption. That also, over a period, puts pressure on hourly wages too, because employers seeing that their workers are able to move to other better paid jobs, face increasing problems recruiting and retaining labour, unless they also raise wages. For all those types of business that have relied on poorly paid workers, they have to, now, become more efficient, usually meaning that large numbers of such small zombie companies go out of business, and a consolidation takes place of their capital.

And, looking at household incomes, as against individual hourly wages this is also important, because most households are not comprised of single individuals. If, just a third of households see someone within that household move to a better paid job, paying on average 14% more, that is the equivalent of all households seeing a rise of around 5%, on top of the overall rise in hourly wages, so that this represents a rise in overall household earnings above the rise in household expenditure due to inflation, enabling additional consumption.

The most obvious and dramatic form of that is where households see one of their members go from unemployment, or part-time employment, to full-time employment. A household that had one member earning £30,000 a year, and now has one earning £31,500, plus another earning £20,000 a year, has obviously seen an increase of household income of around 66%, way in excess of the 10% increase in their household expenditure due to inflation. Whilst, its true that employment levels have only got back to those preceding the lockdowns, the point is that they have risen dramatically compared to those during lockdowns, giving an immediate and significant boost to current household incomes available for consumption.

But, the ability to fund consumption is not solely down to the rise in incomes either, but is affected by savings, and, during lockdowns, because expenditure was artificially curtailed, whilst incomes were maintained via furlough and other such payments, household debt was reduced, meaning that balance sheets were put in a position to finance current consumption, including also from savings. Here also is a further factor, arising from rising interest rates. Although a large proportion of UK households have little or no net savings (about 25%), a considerable proportion do, and as interest rates have risen, so have rates on deposits. Again, the fact that these rates are negative in real terms, compared to inflation, does not tell the whole story.

If you have £100,000 of savings, which now pays you 3% interest, compared to near zero in the last few years, that is still £3,000 of interest you now have that you didn't, and which you have to spend, in addition to what other increase in your income you might have received. Again, overall, the rise in interest rates will act to reduce demand for property, leading to falling property prices, but is not likely to reduce demand for consumption goods much, if at all, as they are bought out of income not borrowing. The fall in asset prices releases capital and revenue for consumption, and the rise in interest rates leads to higher revenues for savers, who then have money to also spend on additional consumption. One of the areas where this is significant is in relation to the large number of pensioner households, especially as these have a higher proportion of their wealth in financial assets.

The government's triple lock means that state pensions have been indexed linked to inflation, so, unlike hourly wages, these incomes are, at least, rising in line with prices. But, again, the devil is in the detail. Suppose you are a pensioner household of two, with combined state pensions of £15,000, and expenditure of £12,000. With a 10% increase in both that means that pension income rises to £16,500 and expenditure to £13,200, so saving rises from £3,000 to £3,300. If, however, your expenditure was £16,000, you go from needing to dip into savings, borrow, or do additional work amounting to an additional £1,000, to being short of £1,100. In general, pensioner households do not have mortgages, or if they do, they will be relatively small, and consequently, they are not hit by the rising interest rates. On the contrary, having paid off mortgages and so on, they are most likely to have accrued savings, and so benefit from the rise in interest rates on savings. They do not, however, generally, benefit from the other effects listed earlier, of having household members going from unemployment to employment, and so on. However, as labour shortages persist, that remains also a further potential for such households to boost incomes and so expand consumption.

In Britain, a large proportion of workers are employed by the state. The NHS is the largest single employer in all regions of the country. But, the state accounts for around 40% of economic activity, with large numbers employed as civil servants, local government workers, teachers, police and so on. These workers also have inflation linked pensions, and that contributes to the protection of those pensioner households, from the effects of inflation on their consumption. If we take the pensioner household example above, and now add in this works pension, so as to obtain a household income of £30,000, the effect becomes fairly obvious. With expenditure of £15,000, and 10% inflation, savings now go from £15,000 to £16,500, and if such a household has £100,000 of savings, with 3% interest, now on those savings, that is an additional £3,000 available for consumption, or an additional £4,500 a year, in total.

In the 1950's, and early 60's, which is the equivalent of the period we are in now, the growing economy did not initially manifest itself in rapidly rising hourly rates of pay. The same has been seen in other periods, as described by Marx in Capital, and Theories of Surplus Value. Marx described, how, as capital required more labour, and having used up reserves of peasants, and others thrown off the land, it turned to employing women and children. If to reproduce labour-power, a male worker previously needed to earn a wage of £10 a year, to provide for a family including their wife and four kids, as the demand for labour rose, the capitalist could actually reduce the male worker's wages to, say, £6 a year, whilst employing his wife and two kids, paying them £5 between them – though often the money was just paid to the male worker for the employment of the family labour. The consequence, however, was that the household income rose by 10%, from £10 to £11.

After WWII, this was seen again. Male workers saw overtime rise significantly, but also married women again entered the workforce, with this same effect that, hourly wages did not rise rapidly at first, whilst household incomes did rise substantially, funding the big rise in household spending on the new ranges of consumer durables such as washing machines, TV's, fridges, vacuum cleaners and so in, and also later motor cars and foreign holidays. Only in the 1960's, as the potential to increase the workforce and social working-day further, by such means, ran into barriers, did hourly wages start to rise, leading to wages squeezing profits, and, in the 1970's, thereby a crisis of overproduction of capital.

Although the lifting of lockdowns has seen a surge in demand for labour, the actual rise in demand as against supply of labour has been taking place since the start of the new long wave upswing in 1999. I've previously referred to the rise in the US Quit Rate as an indication of that in respect of the US labour market, and in both the US and UK, it is seen in the fact that the number of vacancies in proportion to the number of unemployed workers is historically high. But, a look at the total number of jobs to total workforce, for the UK, also illustrates this point, as seen in the following graph.

(Source John Authers Points of Return Blog)

As can be seen, available jobs remained slightly below the available workers, up to 2008, when the global financial crisis led to a sharp drop in available jobs. But, by 2016, that gap was back to its earlier level, and starting to close noticeably. By 2020, the gap had nearly closed entirely, prior to lockdowns, when it opened again, but following the ending of lockdowns, has not just closed, but has seen the number of jobs exceed the number of available workers, creating the current labour shortages, and pressure on wages. That is also exacerbated by Brexit, and the ending of free movement of labour, but was a process already underway.

So, the expectations of the ruling class of speculators and their representatives, of a significant drop in consumption by households, leading to a drop in capital accumulation and hiring by firms, leading to a drop in the pressure on wages and interest rates boosting profits and asset prices is still unlikely, and as employment continues to rise, and wages do begin to squeeze profits, central banks will continue to make liquidity available so that firms can raise prices to mitigate that profits squeeze, leading to a more persistent level of inflation. Already, we saw the Bank of England do more QE, when it should have been doing QT, in the face of a number of pension funds being threatened by the sharp rise in bond yields, last Autumn, we have seen the Federal Reserve do the same following the failure of SVB, Signature and problems for its regional banks, and we saw the SNB get involved in bailing out its banking system, as Credit Suisse went bust.

The reality is that, despite all the talk about tightening liquidity, vast oceans of it are still swilling around the global economy. Looking solely at additional liquidity created by central banks again gives a false picture. That is being reduced, other than for the examples given above, but that is not the only source of liquidity. As Marx describes, capitalist firms themselves create additional liquidity, via the extension of commercial credit. As economic expansion continues, firms simply invoice more, taking payment for what is sold later, and as each of these transactions cancels out others, so less actual currency is required in circulation to fund any given level of transactions. But, in addition to that, there is a huge stock of liquidity that has been created, most of which was tied up in the purchase of assets, and which can flow out of assets, as asset prices drop, and into the real economy, as I have previously described.

This graph illustrates, beautifully, what I have described on numerous occasions. The expansion from 1959 to 1979, follows a very gradual upward trajectory, as would be expected with the growth of the economy itself. From 1979, there is a marked increase in the slope, which flattened again during the 1990's, but then rises in a pronounced manner, after 1999, as liquidity is injected in response to the Tech Wreck of 2000, and the potential for further falls in asset prices, and again pronounced in 2008/9. The curve steepens further, particularly following the onset of lockdowns, and the introduction of various income replacement schemes by the government. The reduction, now, from QT, is put into perspective, by the tiny dip, compared to the huge preceding upward curve.

In the following charts, we see the further effect of this prolonged increase and accumulation of liquidity, in terms of stock and flow, this time in relation to M2, rather than M3. The huge rise in liquidity in 2020/21, is shown in relation to the left hand chart showing year on year growth, whilst the accumulation of liquidity as a stock, is shown in the right hand chart, again emphasising the previous points about the extent to which this phenomenon is one that has arisen in the last 40 years.

Britain has different conditions to the US, and EU, of course. It has Brexit, which has caused its costs of production to rise, and its rate of profit to fall, slowing its potential for growth. Brexit was the project of the petty-bourgeoisie, and, of course, they were not concerned by such factors, based on their interests, and experience of the last 40 years. On the contrary, their inefficient small capitals are threatened both by competition from larger capitals, and by the minimum standards, that the larger-scale capitals, operating at an EU level, take for granted. Brexit protectionism, meant those small British capitals could sustain their higher prices, required to eke out a profit, and they assumed, on the basis of workers' weakness over the last 40 years, that they would simply pass on these higher prices to workers without workers being able to raise wages to compensate. In that they were not alone, because the ruling class speculators, also assume the same thing, not just in Britain.

But, Brexit also simply compounded a problem that capital was facing in that regard, as described above, which is that material conditions have been changing since 1999, and only held back by the effects of fiscal austerity, QE, and lockdowns. That is the using up of the relative surplus population, a slowing of productivity growth, as the effects of the last innovation cycle wane, and so the ability of workers to obtain higher wages. The ending of free movement by Brexit, both increased costs, and reduced the rate of profit, putting further pressure on prices, but also, exacerbated the shortage of labour, and meant that workers were in a stronger position to demand higher wages to compensate for those higher prices.

That is a variant of what has been seen in both the US and EU. In the EU, the effects of the NATO/G7 boycott of Russian oil and gas, looked set to cause it to go into recession, last Winter, but a mild Autumn and Winter seemed to enable it to dodge that bullet. However, the massive rise in EU energy prices to consumers, also led to workers taking to the streets, in protest at that self-inflicted injury, at a time when workers were facing high levels of general inflation, to which they were responding with corresponding wage demands. The protests against the energy boycotts, were often led by the far right, again indicating the bankruptcy of both social-democracy, and sections of the centrist Left that had tied itself to NATO imperialism against Russia~China, in preference to defending the interests of EU workers. The EU, was, however, led to respond, by introducing a wide range of energy price caps, faced with this rising revolt, as did the UK government. That again, was not what would have been anticipated, and acted to keep money in workers pockets to spend on other consumption.

Indeed, the EU has not only avoided recession, but appears to be seeing upward revisions for economic growth in coming months, again dashing the hopes of the speculators. Whilst Britain, has additional problems due to Brexit, it does not stand in isolation, and an increase in EU economic activity will also impact the British economy. However, the other factor is China, which came out of its lockdowns following widespread revolts from its own workers, at the end of last year. Already, that has seen Chinese GDP rise by an annualised 4.5% in the first three months of this year. Much of that growth has also been derived from a rise in Chinese domestic consumption, as against its previous dependence on exports. That also looks set to continue to grow in coming months frustrating all of the predictions of global recession.

When Will Asset Prices Crash? - Part 5

In Part 4, I discussed the way that, in response to the crisis of overproduction of capital, in the 1970's, capital did what it always does, in such phases of the long wave cycle, and engaged in technological innovation, introducing labour-saving technologies, which created a relative surplus population, reduced wages and raised profits, and which also reduced the value of constant capital, thereby raising the rate of profit, as well as causing a release of capital, which becomes available for additional consumption or accumulation. As capital moves from a regime of extensive accumulation to intensive accumulation, during this period, the result is a lower rate of growth of gross output, but a faster rate of growth of net output. Surplus value grows at a faster rate than accumulation, causing interest rates to fall. Asset prices rise, and gambling and speculation is encouraged, leading to asset price bubbles and the subsequent bursting of those bubbles.

A look at the relative figures for economic growth, and of asset prices during these various periods illustrates the point. In the period of the post-war boom, between 1950 and 1980, US GDP rose by 848%, whilst the Dow Jones rose by 312%, and the S&P 500 by 537%. In other words, nominal asset prices rose by only about half the rise in nominal GDP. Compare that to the period 1980 to 2000. During that period, nominal GDP rose by just 256%, whilst the Dow Jones rose by 1,322%, and the S&P 500 by 1,261%. This shows the extent to which asset prices do not reflect the health of the economy, as manifest by growth in GDP, but if anything, have a negative correlation to it. It is the material foundation of the mantra of the financial speculator that “Bad news is good news!”

It is also the time when gambling on stock markets, and in other assets, begins. But, the shift even to an average rate of interest is enough to burst any existing bubbles created on that basis. So, for example, there was a stock market crash in 1962. A look at the inflation adjusted Dow Jones during these periods, further illustrates the point. It rises to around, 1965, and then as interest rates rise, it falls. From the mid 1980's, as interest rates again begin to fall, for the reasons described earlier, it begins its steady rise higher. This explains why asset prices over the longer-run move in the opposite directions to the real economy, and capital accumulation. Whilst, on the one hand, rising surplus value and profits makes possible increased payments of dividends, interest and rent, which acts to increase asset prices, it also acts to bring about the conditions of boom, in which there is extensive rather than intensive accumulation, and, during which period, the demand for money-capital exceeds the supply causing interest rates to rise. The rising interest rates causes any existing asset price bubbles to burst, and exerts a downward pressure on the capitalised value of revenue producing assets.

When interest rates rose in 1987, the existing stock market bubble burst spectacularly; in 1990, in the UK a rise in interest rates caused a large house price bubble to burst, with prices falling by 40% in a matter of months; in the same year, the Japanese stock market bubble was burst, and over the next two years, its property market bubble crashed by up to 90%; in 1994, rising interest rates in the US, caused its bond market bubble to burst, as the bond vigilantes rebelled; in 1997 financial bubbles in Asia burst, followed by a financial crash in Russia; in 2000, the NASDAQ Index fell by 75%, and other indices of technology based and small cap stocks crashed by large amounts across the globe; and of course, in 2007-8, rising interest rates led to the global financial meltdown; in 2018, as global economic expansion again began to break through the limits imposed by fiscal austerity, and attempts to divert money into asset markets, and central banks were led to even just taper their QE programmes, stock markets fell by 20% in the US, with similar falls across the globe.

But, a look at another correlation illustrates why this is the case. It is the correlation with interest rates. In the immediate post-war period, all of the technological innovations created during the previous Innovation Cycle, which peaked in 1935, came into play. All of the technologies based around the internal combustion engine, the development of petrochemicals and plastics, as well as of electric motors, assembly lines, and so on that revolutionised production, in what came to be called Fordism, brought about a huge rise in productivity and output. The social-working day was expanded, as workers were induced to work overtime, married women were brought into the workforce, as new consumer household products replaced much of their domestic labour, and welfare states took on the other tasks of domestic labour, by socialising health and social care, nursery and education provision, and so on. In the US, large flows of black workers from Southern states were encouraged to move to the Northern industrial states, to provide labour in Motown, Chicago and elsewhere, whilst migrants also moved across the border from Mexico into California into its agricultural production. Britain encouraged migration from its colonies to fill labour shortages, and similar patterns occurred across Europe, into France and Germany.

All this meant that absolute surplus value expanded along with this expansion of the social working-day. Relative surplus value expanded, because this rise in productivity continued to cheapen wage goods. Central banks printed money tokens so that money wages rose rather than fell, and together with rising living standards, as workers were able to buy more wage goods – and a rapidly expanding range of wage goods – both because the value of those commodities was falling in real terms, and because, now households comprised two rather than one wage earner, disguised the fact that alongside this the rate of exploitation was rising sharply. That meant that the supply of money-capital, from realised profits, increased more or less in proportion to the demand for money-capital to finance accumulation. So, there is no pressure on interest rates to rise. As Marx describes this cycle.

“On the whole, then, the movement of loan capital, as expressed in the rate of interest, is in the opposite direction to that of industrial capital. The phase wherein a low rate of interest, but above the minimum, coincides with the "improvement" and growing confidence after a crisis, and particularly the phase wherein the rate of interest reaches its average level, exactly midway between its minimum and maximum, are the only two periods during which an abundance of loan capital is available simultaneously with a great expansion of industrial capital. But at the beginning of the industrial cycle, a low rate of interest coincides with a contraction, and at the end of the industrial cycle, a high rate of interest coincides with a superabundance of industrial capital. The low rate of interest that accompanies the "improvement" shows that the commercial credit requires bank credit only to a slight extent because it is still self-supporting.”

(Capital III, Chapter 30)

In this same section, Marx sets out the mechanisms by which this operates. In a period of prosperity, the demand for money-capital is reduced, because the capitalists provide each other with commercial credit, and,

“When we examine this credit detached from banker’s credit, it is evident that it grows with an increasing volume of industrial capital itself. Loan capital and industrial capital are identical here.”

(ibid)

It is largely self cancelling, with money or bankers credit only required to settle outstanding balances, and so does not imply any additional demand for money-capital, beyond that.

“A large quantity of credit within the reproductive circuit (banker’s credit excepted) does not signify a large quantity of idle capital, which is being offered for loan and is seeking profitable investment. It means rather a large employment of capital in the reproduction process. Credit, then, promotes here 1) as far as the industrial capitalists are concerned, the transition of industrial capital from one phase into another, the connection of related and dovetailing spheres of production; 2) as far as the merchants are concerned, the transportation and transition of commodities from one person to another until their definite sale for money or their exchange for other commodities.”

(ibid)

And,

“As long as the reproduction process is continuous and, therefore, the return flow assured, this credit exists and expands, and its expansion is based upon the expansion of the reproduction process itself.”

(ibid)

During the 1950's, therefore, the industrial expansion itself creates this expansion of commercial credit, which finances part of accumulation, without recourse to a corresponding demand for money-capital, which would have caused interest rates to rise. This period ended around 1962. It is when all of the advantages of the technological innovations of the 1920's and 30's, begin to wane, and the period of intensive accumulation gives way to a period of extensive accumulation. In a period of intensive accumulation, when firms replace worn out fixed capital, they bring in the new machines, rather than simply replace equipment on a like for like basis. My father was an engineer, and in the 1930's, worked in car factories across the Midlands. After the war, when he came to work again in North Staffordshire, he said that the machines that were being introduced, in the engineering shops where he worked, were the same machines he had worked with 20 years earlier in the car factories. This illustrates, a process of combined and uneven development. But, overall, this period of extensive accumulation, sees fixed capital increasingly being replaced on a like for like basis, which means, necessarily that the productivity gains of the previous period begin to disappear.

In fact, my dad's work experience, during this period, is a good proxy for these changes. In the 1950's, although he always opposed overtime working, like his fellow workers, he found himself working, often, from 7.00 a.m., in the morning, until 7.00 p.m., and sometimes 9.00 p.m., at night, as well as working half day on Saturday. We were unusual in that my mother did not work, whilst most of the other married women in the street, during that period, did take up employment. By the 1960's, however, wages had started to rise, as hourly wages, and a consequence was that it was increasingly unnecessary to work overtime, first manifest by a reluctance to work weekends, and then extended hours during the week. As Marx describes in Theories of Surplus Value, Chapter 21, this is one way in which, first, absolute surplus value stops rising, as the individual working-day is reduced, and also relative surplus value is reduced, as employers have to pay increased overtime rates for any such extension of the working-day, and so on.

The consequence of this is that from the mid 1960's, capital is compelled to accumulate at a rapid pace, as it enters the boom phase of the cycle. But, wage share rises, both in terms of increased hourly wages, and increased volumes of employment, as productivity growth slows, and also in terms of a growth of the social wage represented by the creation and expansion of welfare states, which socialise large areas of what had previously been domestic labour, bringing them into the realm of commodity production and exchange value. The extensive accumulation of capital, now begins to run ahead of the increase in the supply of money-capital from realised profits.

“To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level.”

(ibid)

In the previous period, the low rate of interest encouraged gambling and speculation.

“... those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers.”

(ibid)

In Part 6, I will look at this in greater detail.

Back To Part 4

When Will Asset Prices Crash? - Part 4

The 1970's, and early 1980's, represented the crisis phase of the long wave cycle. It was a period when the extensive accumulation of capital resulted in capital being overproduced relative to the social working-day. Wage share rose, absolute surplus value stopped expanding, and relative surplus value began to shrink, squeezing profits. As workers' living standards rose, they satisfied their demand for a series of staple wage goods, so that to expand the market for them required their price to fall by ever larger amounts, in inflation adjusted terms. Even for things such as cars, the preserve of the upper middle class, only 20 years earlier, it became common for working-class families to have 2 or even 3 per household. To sell even more of them, became ever more difficult, so that to sell what had been produced, firms found that, not only was a rising wage share squeezing the produced surplus value, but the realised profits were also being squeezed, as profit margins were reduced in order to continue to expand the market. With such large scale production, even small profit margins could produce expanding masses of profit, encouraging firms to continue to compete for their share of the market. But the smaller the margins became, the more likely it was that any increase in output, or change in demand would result in an overproduction, with market prices then falling to a level not just below the price of production, but below the cost of production, so that even small losses on each unit of output now translated into large total losses, on these huge volumes of production.

To resolve such a situation the same two things were required that have always been required when this phase of the cycle occurs. Firstly, productivity has to be raised substantially, so that the demand for labour is reduced, causing wages to fall, and surplus value to rise.

As Marx put it,

“Given the necessary means of production, i.e., a sufficient accumulation of capital, the creation of surplus-value is only limited by the labouring population if the rate of surplus-value, i.e. , the intensity of exploitation, is given; and no other limit but the intensity of exploitation if the labouring population is given.)

(Capital III, Chapter 15)

Secondly, new types of commodity must be developed, so that whole new markets are opened up.  In other words, the process Marx describes as The Civilising Mission of Capital.

In the 1970's that resulted in a focus on new labour-saving technologies being developed, the most notable being the microchip. It meant that labour was shaken out of a whole series of jobs and industries as, with the aid of these new technologies, one person could now do the work of several workers, and what had once been skilled jobs, became semi-skilled or unskilled jobs. This created a relative surplus population, and reduced the competition between firms for labour, causing wages to fall. For a time, a powerful labour movement, built up over the previous twenty years of rising employment and living standards, resisted attempts to reduce wages, but for the reasons Marx and Engels had set out, it was always going to be a doomed project.

As soon as the relative surplus population begins to develop, it becomes competition between workers for jobs, not competition between capitals for labour that is decisive. Firms do not have to offer higher wages to attract new workers. When new businesses develop, using the new technologies, such as the instant print shops that sprang up in the early 1980's, for example, they no longer required the skilled labour of the print industry, and could hire cheap, unskilled labour. Eventually, even the powerful trades unions cannot prevent the inevitable fall in wages, as seen with the defeat of the NUM, in the 1984-5 strike.

As Engels had put it,

“The history of these Unions is a long series of defeats of the working-men, interrupted by a few isolated victories. All these efforts naturally cannot alter the economic law according to which wages are determined by the relation between supply and demand in the labour market. Hence the Unions remain powerless against all great forces which influence this relation. In a commercial crisis the Union itself must reduce wages or dissolve wholly; and in a time of considerable increase in the demand for labour, it cannot fix the rate of wages higher than would be reached spontaneously by the competition of the capitalists among themselves.”

(The Condition of The Working Class, Chapter 10)

In fact, 1985 also represents the peak of that Innovation Cycle, during which all of the base technologies, used in the subsequent period, were developed. All of the development since then has been essentially built on them, and improvements and extensions of those base technologies, i.e. faster, more powerful chips and so on, new applications of chips etc. The consequence was that it again became possible to expand absolute surplus value, as reductions in the individual working-day/week/year/life could now be reversed, and, as Marx describes, although relatively less labour is employed, i.e. relative to output, absolutely more labour is employed, so that both more value, and more surplus value is produced. More labour is employed as a result of the increased individual working-day, and because population increases continue to provide additional labour supplies. That means that both employment and unemployment can increase simultaneously.

This creates the conditions for an increase in produced surplus value, but, as Marx describes in Capital III, Chapter 15, that is only half of the process. The other half consists in being able to realise the surplus value that has been produced. In fact, in reducing wages, this half of the process is complicated, because, the working-class, which now comprises the vast bulk of society, and so of consumers, is placed in a more difficult position, as far as its consumption is concerned. However, there are other factors. Firstly, part of the problem for capital, in the previous period, was that, as wages and living standards rose, the working-class, taken as a whole, was able to accrue savings, either in the form of money, or assets. Some of the higher wages went to buy more wage goods, and some to buy what had previously been luxury goods, developed on behalf of, first, the rich, and then the middle class, such as foreign holidays, cars and so on. But, there was a limit to such spending. Workers, at least individually, were not going to buy their own yacht, for example, though they might collectively go on a cruise for a holiday.

Instead, where, previously, the large majority of workers rented accommodation, in the post-war period, the majority had become owner-occupiers, even if only by taking out mortgages to do so. But, as wages rose, during the 1950's and 60's, the mortgage payments fell, in real terms. From the mid 1960's, as profits began to be squeezed, but capital needed to invest to capture rising demand, it needed to borrow more, in relative terms, causing interest rates to rise. Rising interest rates meant that workers could earn more on their savings. It also meant that the capitalised value of assets such as shares, bonds, and land/property fell, in inflation adjusted terms. So, workers were put in a better position to continue to buy their own house, or even to put money into mutual funds, pension schemes and so on. It was a period, when money-capital, thereby, appreciated, in terms of those assets, and so workers via company pension schemes could begin to accrue for themselves such assets at the expense of the private capitalists, even though, when they did, control over those assets still remained in the hands of the capitalists representatives, via the banks and financial institutions that managed those funds.

The fall in wages, from the 1980's onwards, therefore, was not a total loss for capital in terms of consumption of wage goods, because, in the previous period, not all wages had been used for such consumption. A fall in wages, then, does not result in a corresponding fall in consumption of wage goods, but first of all in a fall in workers savings, and their ability to buy up assets, assets that previously had been the sole preserve of the private capitalist, and which form the basis of their wealth and power in society. Consumption did not fall proportionate to this fall in wages, for other reasons. Firstly, although workers form the vast majority of consumers, their proportion of consumption itself is less than the proportion of society they represent. That is because, capitalists and others who live off surplus value, absorb a hugely disproportionate amount of societies' revenue. When wages fall, and profits rise, capitalists, money lenders, landlords and the state obtain larger revenues, which they can use for unproductive consumption. It means that demand for those types of commodities then rises, and, relatively, production moves away from wage goods towards the production of these luxury goods, and so on.

Secondly, because workers had built up savings in the previous period, in order to maintain their level of consumption, they run down these savings. That can come from simply using savings in deposit accounts, to cashing in mutual funds, life insurance policies and so on, or else from using houses as collateral against borrowing, via equity release schemes and so on. In other words, workers are, thereby, forced to convert capital/wealth into revenue, in the same way Marx described previously. Thirdly, the increase in productivity means that the value of commodities, including wage goods, falls. So, although wages fall, they buy more wage goods. So, for example, suppose workers collectively were paid £100 billion in wages. They produce 10 billion units of commodities, with a value of £1 trillion. The workers consume 1 billion units of what they produce. Now productivity doubles. 20 billion units are produced with a value of £1 trillion, the value of each unit is halved. Wages fall to £60 billion, but now buy 1.2 billion units, representing a 20% increase in consumption. But, the surplus product is now 18.8 billion units, and surplus value is £940 billion, rather than £900 billion. Because, wages are sticky downwards, rather than nominal wages falling in this way, central banks print money tokens so as to create price inflation. So, by doubling the amount of money tokens in circulation, money wages would rise to £120 billion, whilst the total prices of output would rise to £2 trillion. Money profits would rise to £1.88 trillion.

Fourthly, as Marx sets out against Sismondi and others, consumption is not the only form of expenditure in the economy, and revenues are not the only source of demand. The largest and increasing element of expenditure is that required to simply replace all of the consumed materials, and wear and tear of fixed capital, used in production. This expenditure does not come from revenues, but from capital. It is the same as the farmer who replaces their seed from their current output, not from their revenue required for consumption. As productivity rises, and so more material is processed, so an increasing proportion of output is consumed productively in its replacement.

During the 1980's and 1990's, therefore, gross output expands, though at a slower pace than in the previous periods, but net output expands more quickly. In other words, the surplus product and surplus value rises relative to output, and the rate of profit rises along with it. This rise in the rate of profit is fuelled by other factors deriving from the rise in productivity. Firstly, rising productivity reduces the unit value of materials. Secondly, it reduces the value of fixed capital. Thirdly, the rise in productivity is a result of technological innovation, and that means that all existing fixed capital suffers a major moral depreciation. New machines not only mean that 1 worker can replace 3 or 4 workers, but also means that 1 machine replaces three or four existing machines. As Marx describes, the new machine may or may not be nominally more expensive than the machines it replaces, but, in replacing several of them, it is always relatively cheaper.

So, this cheapening of both fixed and circulating constant capital, brings about a rise in the rate of profit. It also creates a release of capital, which is now converted into revenue, which can be used for consumption or additional accumulation. But, the rise in productivity also means that the turnover time for capital is reduced. That arises from a number of factors. Firstly, the working period is a function of a minimum size of output for sending to market. Whatever that minimum for any industry, a rise in productivity means that it is achieved in less time, reducing the working period. Secondly, rising productivity improves transport and communications, so that the circulation time required is reduced. Reducing turnover time, and so increasing the rate of turnover of capital, means that any given amount of advanced capital now sets in motion a larger quantity of productive-capital, and creates additional surplus value. It, thereby, brings about a higher annual rate of profit, even though it also results in smaller profit margins, as the larger mass of profit is spread across a much larger volume of output.

This is what creates the conditions in which interest rates began their long decline in the 1980's, as rising annual rates of profit, and masses of profit exceed the rate of capital expansion. The supply of money-capital from realised profits grows faster than the demand for money-capital to finance accumulation, causing interest rates to fall. Falling interest rates, along with rising profits, which make possible larger dividends, causes asset prices to rise. These are always the conditions in which gambling and speculation are encouraged. In Part 5, I will look at the consequences of that speculation and gambling, and how it created the conditions of the asset price bubbles we now have, and why and how they must burst.

Back To Part 3

Forward To Part 5

Corn and Wheat Prices Rise By More Than 4% In A Day

Yesterday, the prices of both corn and wheat rose by more than 4%.  Corn prices rose by nearly 5%.  At the time of writing today, both have continued to rise by nearly another 1%.  It is part of the continued rise in global inflation fuelled by the excess liquidity that central banks have pumped into economies over the last year, which has fed out into unproductive consumption, as against the vast oceans of liquidity they have pumped into the global economy over the last thirty years, which was directed into inflating huge asset price bubbles in stock, bond and property markets, so as to protect the fictitious wealth of the global top 0.01%.

Wheat and corn prices rise as all that liquidity, finds its way into monetary demand, as the global economy opens up, after a year of it being artificially, and severely repressed due to the imposition of lockouts and lockdowns by governments across the globe.  The rapid increases in economic activity that is being seen, necessarily produces supply bottlenecks and shortages, as for example is most visibly seen with the global shortage of microchips.  Similarly, large rises in prices of some raw materials like copper has caused large consumers of copper in China to reduce outputs, as they could not yet pass on the higher costs of inputs into their final product, but as global inflation continues to rise, their own prices will rise, giving them headroom again, to pay the higher prices for their inputs.

One other symptom is the shortage of labour in various sectors.  Britain is more badly affected by that because of the idiocy of the Brexit decision.  Britain is short of around 70,000 lorry drivers, which hampers the movement of its goods within the country, as well as the further constraints the Brexit imposes on the movement of its goods and people across its borders.  It is also short of around 180,000 workers in the pub, restaurant and hotel business, as that opens up, despite the number of pubs and restaurants that have closed as a result of the economic effects of the lockouts over the last year.  Again, it is made worse by Brexit, as many of the casual workers in the sector were from the EU, and many of whom have now gone back to the EU.  Its hard to avoid some schadenfreude, in seeing the arch-Brexiter, and generally odious Tim Martin of Weatherspoons, now bemoaning the fact that he can't get the cheap labour he needs to produce profits in his pubs, and is appealing to his mate Boris to create a special EU visa scheme to allow EU workers to come to Britain to work in that sector.

Wheat prices, like many other primary product prices have been rising since last Summer.  In August last year, Wheat prices stood at around €177 per ton, whereas today, they are at €220, a rise of around 23%.  In fact, prices were higher earlier in the year, rising to €257, April.  A look at the price movement over the last 20 years, shows the familiar pattern of primary product prices that I have discussed before, in relation to the long wave cycle.  The price bottomed in 1999 at $218 per bushel.  Then, as the new long wave uptrend began, it rose steadily before spiking in 2007/8 to $1039 per bushel, as global food shortages across the globe erupted, as the long wave expansion saw large rises in the global workforce, and living standards, particularly amongst workers in less developed economies.  The 2008 global financial crash, and its impact on the real economy saw prices crash, but by 2010, prices had started to rise again.  Only, as with other primary product prices, when new production began to come on stream, in 2014, did prices start to fall.

But prices have been rising globally again since 2016, as the effects of that surge of new supply began to dissipate, and the continued slow expansion of the global economy, and of the global working class, began to stimulate further demand, and a steady rise in prices.  This is the same process that Marx describes in Theories of Surplus Value, Chapter 9, in his analysis of the long wave movement of primary product prices, and the effects of long-term, large scale capital investment.

A similar thing can be seen with Corn prices that have risen from $303 per bushel in August last year to $688 today, after a temporary pull back from $760 in May.  It shows the same steady rise, from $180, and then spike in prices up to $719, in 2008, with a sharp downturn in 2008/9, followed by a resumption of the rise to $803 in 2012, and then a steep fall to $304 in 2014, as again, all of that investment in new production, and infrastructure, brought new lower cost supplies on to the market.  Prices again bottomed in 2016, as the excess from this new supply was worked off, and prices rose modestly, but then have started to rise abruptly since August 2020.

The idea that these price rises are merely "transitory" is not sustainable.  The actual rise in prices has been taking place since 2016, as the global economy broke through the attempts to constrain it by austerity measures, and by attempts to drain money into asset markets, and away from the real economy.  It has been muted during that time, because of the effects of Brexit in Europe, and Trump's global trade war generally, but the underlying fundamentals have been there for anyone who was looking for them.  The effects of lockouts, and the pumping of vast amounts of liquidity into unproductive consumption, has simply pulled the cork that was gradually being pushed by internal pressure, well and truly out of the bottle.

Labour, The Left, and The Working Class – A Response To Paul Mason - The Political Situation (13/14)

The Political Situation (13/14)

So, the political situation today is not at all the same as it was in the 1920's/30's, and the reason for that is that the economic situation, today, is also not that of the 1920's/30's. Then capital faced a crisis of overproduction of capital, as the demand for labour-power had pushed up wages, squeezing profits. The Labour movement was strong and well organised, coming at the end of a period of 25 years, of economic expansion, and strengthening of the economic and social position of the working-class. To resolve the crisis of overproduction, capital needed a technological revolution that starts in the 1920's, and peaks in 1935, to introduce labour-saving technologies that create a relative surplus population, increases unemployment, reduces wages, and boosts profits. A strong labour movement resists, but in material conditions which are increasingly against it. It is impossible to successfully resist within the limits of capitalism, so unless the workers break out of it, they go down to defeat. Wherever, they seek to break out of the limits of capitalism, they are confronted by fascism and Bonapartism. In the 1930's, as capital imposes these solutions by one means or another, the rate of profit is driven up. Increasing profits (supply of money-capital), with a slower rate of economic expansion (demand for money-capital), means that the rate of interest falls. Asset prices rise through the 1930's, and 40's, but it takes until 1954, until the Dow Jones recovers, in real terms, its 1929, pre-crash levels. 

Today, by contrast, the peak of the Innovation Cycle is already 35 years behind us, in 1985. The years of crisis, and intensive struggle over the introduction of these technologies to replace labour and drive down wages and drive up profits, are also 35 years behind, having been fought out in the industrial battles of the 1970's and 80's, such as the 1984-5 Miners Strike and so on. In reality, that was the situation in 2008/10, and the actions of states since 2010, have frozen things at that point in time, sending the mechanics of the long wave cycle into a ten year hibernation. Every so often, it wakes up, but its anaesthetised with another dose of money printing, sending it back to sleep, but each time, it requires a bigger dose to stop the bear from awakening in a bad mood, and starting to rampage. 

The consequence is that profits remain high, and wages remain low. There is an appearance of high levels of employment, but much of it is fake employment alongside large-scale underemployment. Whenever capital has sought to expand, over the last twenty years, it has never found difficulty in obtaining the labour required, and so it has not faced any significant problem with rising wages squeezing profits, other than for specific types of labour, for limited periods. There is always a background rise in productivity arising from the introduction of new types of machine and technique in different industries, but in periods of extensive accumulation, such as we are in now, this pace of development is below the average, and that is because capital faces no compelling reason to engage in such technological innovation. Rather its focus is to utilise the developments in technology not in relation to means of production, but means of consumption. It is a period when it creates ever more consumer goods based upon the technologies it develops in the previous period, and these form the basis for the expansion of markets in breadth, which also enable the value of all of its existing products to be realised in them.

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Forward To Part 14

Labour, The Left, and The Working Class – A Response To Paul Mason - The Economic Situation (2/6)

The Economic Situation (2/6) 

The solution to these crises of overproduction of capital is to undertake a technological revolution to raise productivity, and thereby replace labour. This is an essential feature of the long wave cycle, an Innovation Cycle that peaks around 40 years before the peak of the long wave itself. That means the shortage of labour is removed, and wages fall, causing profits to rise. As productivity rises, the large fixed capital stock suffers a huge moral depreciation, which again causes the rate of profit to rise, and also leads to a significant release of capital, now available for accumulation. But, with labour being replaced by new machinery (intensive accumulation), and wages falling as a result, consumer demand does not rise rapidly. If consumer demand does not rise rapidly, there is no point increasing output of consumer goods rapidly, and so demand for additional productive-capital. The capitalists put their profits into this new fixed capital, but its used to be able to produce existing levels of output more cheaply, and profitably, rather than to massively expand output or employment. Where output is increased, its of those new types of commodities, which produce high rates of profit. This is what European capitalists did in the 1930's, which leads to the period of stagnation that followed the period of crisis of the 1920's. Large amounts of profits then accumulate as money hoards, which flow into the money markets which causes the rate of interest to continually fall, because the supply of money-capital, from these realised profits expands relative to the demand for money-capital to finance real capital accumulation. 

This is also what happened in the corresponding period of the late 1970's through to 1999, and the continually falling interest rates is also what brought about the initial inflation of asset prices, though it has been the desire to keep those asset prices inflated that has led to central banks being prepared to destroy currencies via QE, and has led conservative regimes to hold back economies via austerity that has meant that those asset prices have continued to be inflated after 2000, and again after 2008. But, this illustrates why the current period is not the equivalent of the 1920's or 30's. It is the equivalent of the 1890's, or the 1950's. In other words, a period in which the working-class should be on the front foot, not the back foot, when the forces of progressive social-democracy should be strengthened as against the forces of conservative social democracy or reaction. 

For example, the crisis that erupted in the 1920's, as described above, was due to an overproduction of capital. Output and the accumulation of capital had reached a point whereby the social working-day could not be sufficiently expanded, so absolute surplus value could not expand, and rising wages were squeezing profits, i.e. the rate of surplus value was falling, and relative surplus value declining, or at least rising only slowly. Any further expansion of capital would cause wages to rise further, and profits to disappear or turn into losses. Profit margins on existing production were extremely tight, but new products that workers might buy were either not available, or else were still too expensive. Only when the technological revolutions of the 1920's and 30's took place, did the prices of some existing commodities fall to levels where workers could buy them, and when new types of consumer products became available, which created the basis for the post war long wave upswing. 

Is that the situation that exists today? Absolutely not. The current long wave upswing began in 1999. I have set out the data, which illustrates that many times before. It is manifest in the large rises in primary product prices, the increase in global trade, and in fixed capital formation, as well as the scale of the increase in output of use values, and the increase in the size of the global working-class, which for the first time becomes the largest class on the planet. But, this commencement of a new long wave upswing is precisely the point where the rate of profit is at its highest levels, having steadily risen from the period of crisis of the late 1970's and early 80's. Along with the increase in economic activity, this high rate of profit means that increased masses of profit are also available. 

This period of the commencement of a new upswing is one in which all of the new base technologies, developed in the 1970's and 80's, to replace labour, continue to raise productivity, and the pools of labour, created during the period of stagnation, of the 1980's and 90's, continue to exist to be drawn down, so that there is no upward pressure on wages, as this production expands. Moreover, in those parts of the globe where growth expands fastest, in Asia, and in the former Stalinist bloc, there is, on the one hand, vast masses of peasant labour that can be turned into industrial labour, and on the other large pools of labour that was previously grossly underemployed. All of this available labour can be employed without any likelihood of wages rising so as to squeeze profits, whilst rising productivity means that the value of labour-power falls, and simultaneously living standards rise. 

In Britain, as the economy grew rapidly, in the early 2000's, and labour shortages, in certain areas, arose, for example, for skilled craftsmen like plumbers, capital was able to simply draw in some of those underemployed Eastern European workers, to ensure that wages, in those spheres, did not rise too quickly. The UK drew in 2 million workers from Eastern Europe at a time when its level of unemployment continued to shrink. The US did similar things taking in workers from Mexico, and South America.  In other words, the social working day  expands significantly as a result of this large increase in the amount of simultaneously employed labour,  and that means that the mass of absolute surplus value also expands massively.

The rate of profit on existing production remains at high levels. Moreover, although, in the last 25 years, we have seen many new products developed, on the basis of the new base technologies, developed in the 1970's and 80's, such as mobile phones, and other mobile devices, the reality is that this is nothing compared to the potential for such new products, which those technologies make possible. And, as new products, they represent entire new markets, new sources of potential demand, profits and employment, as Marx describes in the Grundrisse, in relation to The Civilising Mission of Capital. As new products, they also represent high profit areas of production.

This is the direct opposite of the conditions that existed after 1921, or after 1974. The reason that investment in these new products has not been explosive, despite the high profits, is quite simple. The owners of fictitious-capital have seen even more explosive increases in capital gains from the rises in asset prices. The owners of that fictitious-capital, i.e. shareholders appoint the Boards of Directors that control investment decisions by companies. Rather than use profits to accumulate real capital, or to develop these new products, therefore, those directors have used them to buy back shares, to buy the shares of other companies, and so on, so as to obtain these paper capital gains. The shareholders, and owners of fictitious capital have themselves used the revenues they obtain (interest/dividends) to buy more existing financial assets, thereby inflating their prices, as companies also buy back shares rather than issue more of them. The directors even issue bonds rather than shares, in order to use the money from the bond sales to buy back shares, and inflate dividend payments. And, as these corporate bond sales would have the effect of depressing bond prices, this is countered by central banks printing money so that the excess bonds are themselves bought up by themselves or by commercial banks with the liquidity provided. 

Yet, even despite all of this financial engineering to hold back real capital accumulation, and divert profits and liquidity into such speculation, the reality of the laws of capital cannot be suppressed completely. Companies ultimately have to respond to competition for fear of losing market share and going out of business. If some new product is developed by one company, then other companies in that same sphere have to engage in that production, and so on. Elon Musk pioneered the development of electric vehicles, but now all car companies, and other types of companies have entered that production. Space technology, once the preserve of state capital is a vast new area of capital investment and profits for companies like Spacex and Virgin Galactic etc. But, even this is dwarfed by the potential for the development of personalised healthcare solutions, biotechnology, genetic technology and cybernetics.

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