Global Markets Tumble

On the first trading day of 2016, global financial markets have tumbled.  The Chinese stock markets, which rose by more than 100% at the start of last lear, before falling more than 30%, fell another 8% yesterday alone, before being closed early to prevent further losses.  In fact, the only reason last year's fall was stopped was intervention in the market by the Chinese authorities.  Those falls sparked falls on other Asian markets, and European market opened with falls of around 2.5%.  In some ways its a question of life mirroring art once again.

As I wrote towards the end of last year, the election of a left-wing, anti-austerity government in Spain, featured in my new novel, 2017, as part of a process of similar governments being elected across Europe.  In the book, massively inflated stock markets crash at the start of January 2017, amidst rising tension in the Middle East.  The only difference here is its the start of 2016, rather than 2017.

The fact is that, financial and property markets are grotesquely overpriced, and the only wonder is that they have not already crashed by much more than this current drop.  The only reason they have not, is massive and unprecedented levels of intervention, and manipulation by states, to prevent it, so as to protect the fictitious wealth of private, money-lending capitalists, who leech off the productive-economy, and who fuel such panics and financial crises, through their gambling and speculation.

The open manipulation of the markets by the Chinese state authorities, is only a more transparent and honest effort at protecting the interests of those financial gamblers and speculators than is the same manipulation that has been undertaken to the same purpose and effect by governments and central banks in the West over the last twenty-five years, or so.

The biggest threat to those financial markets, though you would not know it from all of the financial pundits, and media, is that the pace of economic growth increases.  Those same representatives have this morning been quick to try to explain the falls in financial markets, by the continued slow down in the Chinese economy.  In past weeks, they have explained the fall in global oil prices, and other primary product prices, in similar terms.  Yet, the fact is that global oil demand has continued to rise, not fall.  It rose by around 2.5%.  Demand for other primary products has also generally continued to rise, or at least not fall significantly.  It is not falling demand, or under-consumption that explains falling global prices for primary products ranging from milk to oil, and copper to iron ore, but overproduction.

As demand boomed with the onset of the new long wave boom in 1999, demand for all these things rocketed, and prices for them soared, sending profits from their production soaring too.  Eventually, that led to a massive splurge of investment.  It led to the fracking boom in the United States, to billions of dollars being invested in huge industrial farms in Angola and other parts of Africa, and to a massive investment in new mines in Central Asia, Africa and Latin America.  It is the huge expansion of production of these primary products that resulted from it that has increased supply, and driven down global prices, often, for many of the higher cost producers, below their current costs of production.

But, the apologists for capitalism have never been able to reconcile themselves with the idea that capitalism suffers crises due to such overproduction.  The fall in market prices of commodities has to be explained by inadequate demand and underconsumption, and similarly the fall in financial markets has to be explained, by weak economic activity.  But, historically, it is strong economic activity that causes financial markets to perform badly, and vice versa.  Strong economic activity raises the demand for capital, relative to its supply, which causes interest rates to rise.  But, the prices of revenue bearing assets such as shares, bonds, and land are determined by a capitalisation of the revenue they produce.  So, when interest rates rise, that capitalised price falls.  That causes falling prices of stocks, bonds and property.  It is why the apologists of this money-lending capital pray for weak economic activity, so as to keep interest rates low, and these asset prices, which are the basis of their fictitious wealth, inflated.

But, yields on these financial assets are now so low, at near zero, that even a tiny absolute rise, represents a huge percentage rise, which means an equally huge drop in the capitalised prices of the assets.  A rise in interest rates from 0.25%, to 0.50%, for example, means a 100% rise in the rate!

A look around the globe, shows, however, that, for example, in Saudi Arabia, an economy that, until the last year or so, pumped huge amounts of money-capital into global financial markets, as speculation in shares and bonds, is now forced to borrow money from those markets to finance its spending, as oil prices have fallen.

China, which also pumped masses of money-capital into those financial markets, is seeing its, once apparently endless, supplies of labour-power dry up, causing wages to rise, and the rate of surplus value fall.  In order to develop its own domestic market, which requires a fall in the savings rate by its workers, it is being force to follow the pattern in other developed economies, of creating an extensive welfare state.  To open up, further supplies of exploitable labour-power, it needs to spend billions of dollars on communications and infrastructure to open up its central and western regions.

In Europe, anti-austerity governments are being elected.  But, in any case, in order to compete with new rising economies, the EU needs itself to spend billions on renewing its own infrastructure. That comes at a time when the biggest productivity gains from all of the new labour-saving inventions developed in the 1980's, and their subsequent spread into a range of applications, are coming to an end.  Prior to 2008, wages had started to rise rapidly, and that trajectory is being resumed, which again squeezes profits, at a time when firms will need to invest in more productive-capital, so as to meet the demand for more wage goods, as wages rise.  A similar situation exists in the US.  It is a scenario I set out more than a year ago, in my first book - Marx and Engels Theories of Crisis, Understanding The Coming Storm.

It means the demand for capital is rising, at a time when the supply of capital is growing at a slower pace, causing interest rates to rise. The consequence is inevitably that instability will increase in financial markets, and stock, bond and property markets will fall.

Capital III, Chapter 22 - Part 1

Division of Profit. Rate of Interest. Natural Rate of Interest.

Marx begins by reminding us that his analysis, in Capital, is not an analysis of competition. He intended an analysis of competition at a later date, as part of his overall plan. It is impossible to analyse capital without analysing the role of competition. For example, its impossible to understand the mechanism for the process of development of a general rate of profit, without understanding how competition causes market prices to fall below exchange values, where the rate of profit is above the average, but this requires only an acknowledgement of this role, rather than a detailed examination of competition and its effects.

Similarly, its impossible, as Marx says, to understand the industrial cycle without an analysis of competition.

“The circuit described by the rate of interest during the industrial cycle requires for its presentation the analysis of this cycle itself, but this likewise cannot be given here. The same applies to the greater or lesser approximate equalisation of the rate of interest in the world-market.” (p 358)

All of these things were to have been part of his greater intended work. For now, his analysis is concerned with the underlying mechanisms of capital, of which these other phenomena are superficial reflections. In this chapter, he is concerned with the analysis of interest-bearing capital, as an independent form of capital, and of interest as a separate form of revenue from profit.

As stated earlier, because capital, as a commodity, is a use value that has no value, it has no locus of market value, around which the market price revolves. But, the range of interest rates, that are generally possible, is effectively limited, because at the one end, an interest rate that is too high would reduce profit to zero, and one that was zero would give no reason for the owners of money-capital to lend. It should be pointed out that the interest rate being discussed here is an average market rate of interest. The rate of interest, in particular instances, will always vary above or below this rate, for the same reason that Marx describes about different rates of interest on the world market. That is that different borrowers may be more or less likely to repay the loan, and so lenders will require more or less compensation for those different degrees of risk.

As was stated previously, under other modes of production, even the upper limit, set by the amount of profit, out of which interest could be paid, presented no constraint. Whenever the amount of interest to be paid is greater than the mass of profit, this is only possible by a diminution of the capital itself, i.e. converting capital into revenue. This may be the case for individual capitals, particularly because those capitals that face the highest individual rates of interest will do so, because they represent the highest risk, because of making lower than average profits.

It may occasionally be the case generally, but only as an exception, because, as soon as industrial capital becomes dominant, by definition, money-capital is subordinated to its interests. Industrial capital could not survive, if money-capital was able to drain too large a portion of interest from it.

“Since interest is merely a part of profit paid, according to our earlier assumption, by the industrial capitalist to the money-capitalist, the maximum limit of interest is the profit itself, in which case the portion pocketed by the productive capitalist would = 0. Aside from exceptional cases, in which interest might actually be larger than profit, but then could not be paid out of the profit, one might consider as the maximum limit of interest the total profit minus the portion (to be subsequently analysed) which resolves itself into wages of superintendence. The minimum limit of interest is altogether indeterminable. It may fall to any low. Yet in that case there will always be counteracting influences to raise it again above this relative minimum.” (p 358)

Back To Chapter 21

Forward To Part 2

Capital III, Chapter 21 - Part 14

The market price of capital as a commodity is determined, as with every commodity, by the interaction of demand and supply. But, as stated earlier, for all other commodities, the fluctuations of demand and supply only explain the movement of this market price, its deviation from the market value or price of production. But, capital as a commodity has no market value or price of production. For all other commodities, if demand and supply coincide, then they cease to explain anything, and the price of the commodity is explained by the immanent laws of capitalist production.

“The same applies to wages. If supply and demand coincide, they neutralise each other's effect, and wages equal the value of labour-power. But it is different with the interest on money-capital. Competition does not, in this case, determine the deviations from the rule. There is rather no law of division except that enforced by competition, because, as we shall later see, no such thing as a "natural" rate of interest exists. By the natural rate of interest people merely mean the rate fixed by free competition. There are no "natural" limits for the rate of interest. Whenever competition does not merely determine the deviations and fluctuations, whenever, therefore, the neutralisation of opposing forces puts a stop to any and all determination, the thing to be determined becomes something arbitrary and lawless.” (p 356)

As a result, everything appears superficial. Interest appears to be a function of time, whereas profits are not. But, Marx demonstrates this is not so. As seen in previous chapters, the rate of profit is also a function of the rate of turnover of the capital, whereas the rate of turnover of merchant capital also determines the profit margin per unit, and consequently unit prices.

“With his usual insight into the internal connection of things, the romantic Adam Müller says (Elemente der Staatskunst, Berlin, 1809, Dritter Theil, S. 138);

'In determining the prices of things, time is not considered; while in determining interest, time is the principal factor.'

He does not see how the time of production and the time of circulation enter into the determination of commodity-prices, and how this is just what determines the rate of profit for a given period of turnover of capital, whereas interest is determined by precisely this determination of profit for a given period. His sagacity here, as elsewhere, consists in observing the clouds of dust on the surface and presumptuously declaring this dust to be something mysterious and important.” (p 356-7)

Back To Part 13

Forward To Chapter 22

Back To Capital III Index

Capital III, Chapter 21 - Part 13

The fact, as seen earlier, that with the advance of capitalist production, an increasing quantity of capital must take the form of money hoards, and these money hoards are increasingly in the hands of money capitalists does not change this. However,

“The entire transaction, as assumed, takes place between two kinds of capitalists — the money-capitalist and the industrial or merchant capitalist.” (p 353)

And because the money-capitalist drains a portion of profit in the shape of interest, this establishes a contradiction of interests between these two groups.

“If we want to call interest the price of money-capital, then it is an irrational form of price quite at variance with the conception of the price of commodities.” (p 353)

Price is the value of a commodity expressed in money, as the universal equivalent form of value. But, price is irrational here insofar as the value lent is itself a sum of money. It is irrational to say that the price of £100 is £100, and even more irrational to say that the price of £100 is £5!

“How, then, can a sum of value have a price besides its own price, besides the price expressed in its own money-form? Price, after all, is the value of a commodity (this is also true of the market-price, whose difference from value is not one of quality, but only one of quantity, referring only to the magnitude of value) as distinct from its use-value. A price which differs from value in quality is an absurd contradiction.” (p 354)

The answer, as seen, is that the commodity here is not the sum of money lent as capital, but its use value as capital. But, the price is then irrational for the second reason which is that this use value has no value, and as price is only value expressed in money, it is a contradiction to have something which has no value, expressed in money.

“This shows how absurd it is from the very first to apply here to the simple relations of exchange through the medium of money in buying and selling, as Proudhon does. The basic premise is precisely that money functions as capital and may thus be transferred as such, i.e., as potential capital, to a third person.” (p 354-5)

As stated earlier, the use value of capital, whether in the form of money or commodities, depends on the ability of that capital to self-expand. Money or commodities can be employed simply as money or commodities, or else as capital, and what enables the latter is the existence of its opposite, wage labour, which is the basis of its self-expansion.

“The contradictory social features of material wealth — its antagonism to labour as wage-labour — are expressed in capitalist property as such independently of the production process. This particular fact, set apart from the process of capitalist production itself, from which it constantly results and as whose constant result it serves as a constant prerequisite, expresses itself in that money and commodities alike are latent, potential, capital, so that they may be sold as capital, and in that they can in this form command the labour of others bestowing a claim to appropriate the labour of others, and therefore represent self-expanding values. It also becomes clearly apparent that this relationship, and not the labour offered as an equivalent on the part of the capitalist, supplies the title and the means to appropriate the labour of others.” (p 355)

Back To Part 12

Forward To Part 14

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An oldie but a goody.

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Capital III, Chapter 21 - Part 12

As discussed earlier, capital as a commodity is similar then to labour-power. By paying the worker the value of their labour-power, that labour-power is restored to them. When the industrial or merchant capitalist borrows money-capital, they similarly restore that money-capital to the lender. But, here is the difference. Labour-power is not capital. The worker only receives the value of labour-power in return. But, the money-capitalist, by contrast, not only receives back the capital they loaned, but an additional amount besides.

The industrial capitalist buys labour-power to obtain its use value, of being able to create new value and surplus value.

“And in like manner the use-value of loaned capital appears as its faculty of begetting and increasing value.” (p 351)

It is not the capital that the money-capital alienates, as a commodity, but only this use value, of being able to self-expand. Because the money-capitalist does not alienate the capital itself – it remains in their ownership – they receive no value in exchange for it. The value of the capital never leaves their ownership.

The money-capitalist relinquishes possession of the money-capital, but not ownership. In contrast to normal commodity purchases, it is here the seller that hands over value, and the buyer that receives it. That is because, in this transaction, the thing being sold is value itself, and its ability as capital to self-expand.

“The use-value of the loaned money lies in its being able to serve as capital and, as such, to produce the average profit under average conditions.” (p 352)

The buyer of a commodity does so to obtain its use value and what they pay for it is its value. The borrower borrows money-capital to obtain its use value, but what do they pay for it? As indicated earlier, when a commodity is exchanged, its value is known, but what is the value of this use value of capital? Unlike those other commodities, this use value is not one that has been produced by labour.

The extent of the use value of the capital depends on its ability to self-expand. The more it is able to do so, the more use value is alienated. The more therefore, of this use value will be demanded, and consequently, the higher the market price will be. For other commodities, this higher market price would increase the profit created, from the sale of these commodities. That would encourage the investment of additional capital, in this sphere, pushing prices back down towards the value of the commodity, until the rate of profit returned to the average.

But, firstly, there is no cost of production, and no value for this commodity – capital. If demand for money-capital rises, because the potential for profits on productive-capital rises, then interest rates may rise, but there is no objective basis for determining how much additional supply might be forthcoming as a result, because there is no value, or price of production, for this commodity, to act as a pivot around which the market price would move.

But, also, aside from the potential to mobilise additional money-capital, via primary accumulation, the supply of this money-capital itself depends upon the mass of profits created by productive-capital, because the additional money-capital only exists because it is the money form of the realised surplus value, created in production. The available money-capital will then depend upon the mass of this realised surplus value, compared to the immediate requirements for its use for accumulation.

Back To Part 11

Forward To Part 13