Capital II, Chapter 20 - Part 13

Marx then returns to the contradiction in Adam Smith's argument, in which the value of commodities resolves itself into wages and surplus value.

“This absurdity is indeed found in Adam Smith, since with him wages are determined by the value of the necessities of life, and these commodity-values in their turn by the value of the wages (variable capital) and surplus-value contained in them.” (p 412-3)

Smith forgets, says Marx, that in simple commodity exchange its only the total production cost that counts, and how that breaks down into necessary or surplus labour-time, or paid and unpaid labour, is irrelevant to the exchange value of the commodity. It is also irrelevant to its value whether that commodity is consumed after it has been sold or is used as productive-capital by the purchaser.

“This is in no wise altered by the fact that in the analysis of the circulation of the total annual social product, the definite use for which it is intended, the factor of consumption of the various component parts of that product, must be taken into consideration.” (p 413)

In order for the exchanges to take place in the model above, it is not necessary that the capitalists actually do allocate their spending on consumption goods in the way described. They may, in aggregate, demand more or less luxury goods, or necessities. The Department 1 capitalists may demand more luxury goods than Department 2 capitalists, and Department 2 capitalists in a and b may demand different proportions. Whatever these proportions, the levels of supply will simply be adjusted to correspond. It is the total level of surplus value that is determinate.

“On the basis of simple reproduction it is merely assumed that a sum of values equal to the entire surplus-value is realised in the consumption-fund. The limits are thus given.” (p 413)

This illustrates the interaction of the objective and subjective elements in Marx's theory. The actual value relations are objectively determinable, but no objective basis for determining how capital will be allocated, resulting from that, exists, because that depends, not upon objective value relations alone, but on consumer preferences. There is no objective basis for determining what proportion of surplus value capitalists will spend on luxuries as opposed to necessities. Orthodox, bourgeois economics has spent literally billions on research, to try to uncover the psychological basis of “marginal utility”, largely without success. 

In a sense, it does not matter, and as far as these consumer preferences are concerned, Marxists can simply agree with the Austrian School that “people act”. In other words, consumers make decisions over what to buy, and why they make this choice rather than some other is irrelevant. Unlike the Austrians, however, Marxists do not see these individual consumer decisions as determinant of prices.

Prices are a function of value, which is objectively determined. Consumer preferences only then determine the levels of demand at those prices. Capital is then allocated accordingly so that demand at that price is satisfied. In short, transformed values (prices of production) determine prices, prices in combination with consumer preferences, determine demand, demand determines the allocation of available social labour-time (supply). No general equilibrium is possible because technological change continually alters values (supply), and continually changing consumer preferences alters levels of demand.

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Forward To Part 14

Another 2008 Is Inevitable - Part 2 of 5

In Part 1, it was described how loanable, money-capital (bank loans, shares, bonds etc.) is only fictitious capital. It can only earn interest to the extent that productive-capital creates surplus value. Yet, large amounts of this loaned money-capital is loaned, not for the purpose of buying productive-capital, but to finance consumption by households, the state etc. It drains surplus value without facilitating the creation of additional productive-capital, required for the generation of such surplus value.

However, the owners of these bonds, shares etc. can use them as though they were real capital. They can be used, for example, as collateral, against which to borrow money. For banks, such collateral can not only be used to borrow money, but it can be used as bank capital, which means that the bank can itself lend money against it. Because banks can make loans that amount to many times the value of this “capital”, that sits on their balance sheet, their capital can expand by many multiples more still.

As 2008 showed, these banks and financial institutions can then take this fictitious capital and bundle it up into other commodities – derivatives – that can be sold on the market, and each of these appear for the owner as capital too.

If we look at US GDP between 1980 and 2000, it rose from $2,788 billion to $9,951 billion, a rise of 257%. However, the Dow Jones, in the same period rose from 824 to 11,723, a rise of 1,323%! The S&P 500 rose from 107.94 to 1469.25, or 1,262%. The increase in GDP is not an accurate measure of the extent to which US real capital expanded during the period for the reasons set out elsewhere, that the way capitalist economies calculate output is inadequate from a Marxist perspective, being really only an expression of the growth in the consumption fund. However, the relative proportions do give an indication of the extent to which fictitious capital grew in relation to the expansion of real capital during that period.

But, in fact, this does not itself give the full picture, because this only reflects the bubble that was created in stock prices; it does not reflect the bubble in bond prices, or the growth of bank capital. A look at property prices, in the US and UK shows that it was during this period, also that the bubble in house prices was initially inflated. In 1970, the average house price in the UK was £4,900. Despite a house price crash in 1974, and a period of stagnation until the latter part of the 1970's, by 2000 it was £101,500, a rise of 1,971%.

If we take just one bank, Deutsche Bank, for example, its reported that its total global exposure to derivatives is €55 Trillion!!! To put that in perspective, Germany's annual GDP is only €3 Trillion. That is an exposure equal to 20 times German GDP, or about the same as the total global GDP! By contrast, the Cyprus Banks' assets were 8 times annual GDP, when they went bust. Deutsche Bank's exposure to these derivatives is on the same scale as the Luxembourg banks' ratio of assets to GDP, and Luxembourg is likely to be one of the next economies to go the way of Cyprus. If the banks in Cyprus were deemed to have been dangerously over exposed, what does that say about the over exposure of the much larger, German banks? Moreover, this situation has not been improved since 2008, it has been made worse.

The US banks were, at least partially, recapitalised by the state, and by the introduction of additional private capital. A large part of their bad debts was wiped off, because the state introduced measures to bail out home buyers who could not repay their mortgages, and whose property had fallen to a more realistic price, often 60% below its peak 2008 level. Even UK banks have had additional capital provided by the state, and some additional private capital, but nowhere near enough, given their exposure to this mountain of debt, founded upon grossly inflated assets. The European bank stress tests have widely been regarded as a sham. On each previous occasion, within a few months of banks being given a clean bill of health, some of those same banks have gone bust, as happened with the banks in Cyprus. Its not likely to be different with the current Asset Quality Review (AQR), though already its being suggested that a number of EU banks will fail it, and be allowed to go bust. The decision, after Cyprus, to make bondholders, as well as shareholders suffer a loss of their capital, as well as the precedent, set in Cyprus, of expropriating the deposits of savers, means that there are a range of unintended consequences, that could spread contagiously from any future such bank collapses.

Rather than recapitalising banks, which would be near impossible, given the actual amount of capital that global banks require to remedy their insolvent position, the European banks have been stuffed with liquidity. The Long Term Refinancing Operations (LTRO) do not provide European Banks with capital, but only with money, in the shape of cheap loans. With these cheap loans, they have been encouraged to buy the bonds of the peripheral states. Its partly on that basis that the price of those bonds has risen, reducing the yield on peripheral European bonds, even down to levels lower than on the bonds of the UK and US. This gives an indication of just how surreal the situation is that all of this debt has created.

On the one hand, we have more wealth, in the shape of use values, than at any time previously in history, but, the cause of that, the huge rise in productivity over the last thirty years, is also the reason that the individual value of commodities has fallen significantly. That would have caused a deflation of consumer goods prices had it not been for a devaluation of money by money printing and an increase in credit money.

Whenever any particular currency is not expanded relative to the value of the dollar, the value of that currency rises, and it suffers a relative deflation of prices, particularly where its economy is more dependent on trade, and the role of dollar denominated prices. For example, oil is denominated in dollars, so if the value of your currency rises against the dollar, the price of your oil imports falls in your own currency. But, this same process puts downward pressure on domestic prices, forcing producers to seek to become more efficient. This, in turn leads to a further rise in the currency based on these rising proportional levels of productivity. Its why Japan, for example, has had a problem sustainably reducing the level of the Yen against the dollar, despite action by the Japanese central bank, but its also why Japan has had difficulty breaking out of the deflationary spiral it found itself in during the 1990's, when not only did consumer prices begin to fall, but the previous bubble in stock, bond, and property prices also burst. The NIKKEI rose six fold during the 1980's, reaching its high of 38,957 on December 29^th 1989. It fell by 82%, down to around 7,500, thereby wiping out nearly all of its gains for the 1980's. Japanese property prices fell by similar amounts.

Many emerging economies saw the same phenomenon. Their import prices fell, pushing their inflation and interest rates lower. As, the US began to taper QE, an opposite reaction set in. The currencies of these economies fell, their import prices rose, their inflation rate rose, their bond prices fell, pushing market interest rates higher, and in order to defend the currency, and ward off inflation, the state also raised official interest rates. As the bonds from these economies sold off, the money flooded into safer bonds, such as the US, UK, and even peripheral Europe, where they were seen as being backed by central banks. It was on this basis that the process described at the beginning, of a situation where rates are both rising and falling is created. Interest rates in large parts of the globe are rising, and the funds released from these sources, wash into the bonds of other economies, pushing their prices higher, and their yields lower. It is a process I described previously – Volley Firing.

Now, as predicted, in that article, this process, of ratcheting up global interest rates, has once more reached Europe, as Greek and Portuguese bonds have fallen, with Greek yields rising from around 5% to over 9%.

The US, massively devalued the dollar, by printing more of them. It did not suffer large scale commodity price inflation, because the individual value of commodities has fallen in equally massive proportions, due to rises in productivity, and a shift of production to China, and other low cost areas. But, its not true to say, as the Keynesians do, that the US or the UK has not suffered from inflation, as a result of this devaluation of the currency. The deflation of commodity prices is mirrored by a massive inflation of the price of land, property and fictitious capital.

Ask someone trying to buy or rent a house in London or New York whether there has been inflation! One reason the consumer price indices show low levels of inflation is that they exclude these prices, for things which constitute a major element of people's real cost of living. Nor does the cost of servicing a mortgage give a fair indication of that cost. Its true that if you bought a house, in 1990, that cost £30,000, with a mortgage rate of 15%, then the £4,500 a year of interest, on that, would be more than if you bought the same house today, at £120,000, with an interest rate of 3%, or £3,600 in interest per year.

However, you still have to repay the additional £90,000 of capital sum borrowed, and the current 3% interest rate is likely to rise, just as the 15% rate of interest in 1990 fell. Something like Robert Schiller's Cyclically Adjusted Price Earnings ratio used for measuring stock prices, by taking some historically determined average rate of interest over the life of a mortgage, would give a better measure of affordability.

If the inflation of property prices were taken into consideration, the situation would be seen as significantly different over the last thirty years. In a addition, a similar situation exists with pension provision. In 1980, had someone saved £100 a month in a pension fund, invested wholly in Dow stocks, it would have bought thirteen times more shares than the same amount in 2000. Put another way, to have maintained the same purchase of shares into their pension, they would have had to have saved £1300 per month rather than £100 per month.  As the price of shares bubbled up, so the yield on those shares (the ratio of the dividend to the price) fell, as also happened with bonds.  As pensions are paid from this interest, pension savers were hit doubly, as the number of shares and bonds they got for their money fell sharply, and the interest they got on the shares and bonds in their pension fund also fell, which is why annuity rates have collapsed.

Moreover, a look at the UK, where money was printed, as in the US, shows that even consumer goods prices rose. In 2007, just ahead of the financial crisis, Alistair Darling appeared on TV to warn against excessive pay rises (Oil tanker drivers had just struck and won a 14% pay rise), as inflation rose sharply. Even after 2008, the Bank of England failed to keep inflation within its 2% limit, with it being between 4-5% for much of the time. Only in the last year, after the Bank of England ended its QE, causing the Pound to rise against the dollar, has inflation fallen. The Pound went from around £1 = $1.50 to £1 = $1.70 a few months ago. Now, as US QE ends, the Pound has fallen back to £1 = $1.60, and continues to drop, threatening to push UK inflation higher once more.

In China, which pegged its currency to the dollar, there has been continuous inflation. It countered that by rapidly rising levels of productivity, but now with productivity gains waning, and with Chinese wages having risen considerably over the last 30 years, one of the main factors in reducing the value of commodities has been removed. As indicated at the beginning, commodity prices did not rise significantly, despite a lower value of money, only because commodity values fell significantly. If now, commodity values do not fall so rapidly, but the vast amount of money that has been printed continues to circulate in the global economy, the consequence can only be for those prices to rise sharply. Inflation will increase unless liquidity is taken out of the system, but a reduction in that liquidity, will cause all those asset prices that were previously inflated to collapse. The bubbles blown up over thirty years, in stocks, bonds, and property will burst, just as happened in Japan in the 1990's. In the same way that emerging economies have seen their interest rates rise, as their currencies fell and their inflation rates rose, so a failure to reduce liquidity generally will have a similar effect. As inflation rises, bond buyers will demand higher yields, they will offer lower prices for bonds; interest rates will rise; higher interest rates necessitate lower share prices, and for those that have taken on vast amounts of debt for unproductive purposes, such as house buying or speculation, they will be crushed between higher debt servicing costs, and lower asset prices.

The basic reason another 2008 is inevitable can be summed up in one word – debt! Debt is the other side of the coin to the growth of all this fictitious capital, whether it be in the form of astronomically inflated property prices, share prices, or bond prices, and a range of other speculative assets such as art, wine and so on whose prices have risen way beyond any rational concept of value, solely on the back of excess liquidity, which fuelled speculation. Every such speculative bubble going back to the Tulipmania eventually bursts, and, as in 2008, everyone, after the event, asks why no one saw it coming, when, in fact, lots of people did see it coming, but no one, caught up in the mania, wanted to listen to the warnings.

And, in fact, after 2008, far from the actions of of governments and states reducing that problem of debt, they have increased it, alongside the further expansion of the fictitious capital. Rather than recapitalising the banks, they have been stuffed full of additional, freshly printed and thereby devalued currency. Instead of pursuing measures to increase investment in additional productive-capital, which is the only means of creating the surplus value that can service the debt, and produce the real capital, needed to recapitalise the banks, the needs of financial capital have been given priority once more. In some cases, the very opposite of what was required has been pursued. The policy of austerity in the UK and parts of Europe, is rather like the situation Marx describes, in relation to the 1844 Bank Acts, that in order to protect fictitious capital, real capital was destroyed. Austerity not only destroyed real social capital, but, in the process, it undermined real productive-capital dependent upon demand from the state. In order to maintain aggregate demand, from consumers, instead of providing the basis for a growth of wages, based on a growth of real capital, the same policies, that led to the crash of 2008, were simply repeated, encouraging yet more consumer debt, via policies like Help To Buy etc.

Back To Part 1

The Law of The Tendency For The Rate of Profit To Fall - Part 52

Effects On The Rate of Industrial Profit (1)

In his analysis of “Capital in General” in Capital III, and its division into the independent forms of capital – Productive-Capital, Money Capital and Merchant Capital – Marx distinguishes between the commercial capital, comprising the merchant capital and money-dealing capital, which obtains its share of surplus value, as profits, because of its role in realising produced surplus value, and interest-bearing-capital, which obtains instead interest, as the market price obtained for the sale of capital itself as a commodity. This distinction is important, because ultimately what capital is concerned with is not produced surplus value, but realised profits. Merchant capital does not increase the quantity of surplus value produced, but it does increase the quantity of it realised as profits, and as a result it acts to raise the general annual rate of profit, which can only be measured by the amount of surplus value realised. Interest-bearing capital, by contrast, neither produces surplus-value, nor facilitates its realisation. Unlike, Merchant Capital, therefore, it cannot have any role in increasing the rate of profit. It can only act as a reduction on the mass of industrial profit, and so on the rate of profit.

A considerable portion of the capital employed in the financial services industry, on this basis should be considered, money-dealing capital, as a portion of commercial capital, rather than interest-bearing capital. It is involved in the process of moving money-capital around the system, and thereby reducing the costs of circulation by various means, and thereby increasing the mass of realised profits. To that extent, its actions can be a means of raising the general annual rate of profit, just as the actions of merchant capital, in reducing the costs of circulation of commodities brings about the same effect. In Marx’s schema, these independent capitals, are merely the commodity-capital, and money-capital that form part of the circuit of industrial capital, alongside productive-capital, that have become separated from it, and they share in the industrial profit, on this basis. By contrast, interest-bearing capital exists outside this circuit. It is not additional capital, but only the same capital that functions twice – once as interest bearing capital, sold as a commodity by the rentier capitalist, and second as industrial capital in the hands of the productive or merchant capitalist. It is only in the hands of these latter that it actually functions as capital to expand value, by either producing surplus value in the case of the productive-capital, or increasing the realisation of surplus value in the hands of the merchant capitalist.

The way in which the rise in social productivity, that is the means by which the tendency for the rate of profit is established, affects merchant capital, in terms of its rate of turnover, was dealt with earlier. What was said there, more specifically, in relation to merchant capital, in relation to the reduction in costs, for commodity circulation, applies also to money-dealing capital. In so far as the rise in social productivity, reduces the value of constant and variable capital, employed as capital in circulation, it raises the general annual rate of profit, for the same reason that such reductions in the value of productive-capital, cause the rate of profit to rise. To the extent, that this rise in social productivity causes the rate of turnover of these capitals to rise, it again causes the rate of profit to rise, because this increased rate of turnover means that less capital is advanced, as capital in circulation, to circulate any given quantity of commodities, and to realise any given quantity of surplus value. But, this same rise in social productivity, in so far as it leads to the changes in the nature of labour employed, by capital in circulation, to increase the value of its product, equally acts to raise the rate of profit, for the reasons outlined by Marx, that a given quantity of complex labour will realise a greater quantity of value than the same quantity of simple labour.

In addition, the increase in social productivity, by reducing capital value, and by reducing the value of capital advanced, relative to surplus value produced, as a result of an increased rate of turnover of capital, also brings about a release of capital, as described earlier. This released capital, alongside the relative surplus population, can then be utilised for increased accumulation, either in the existing industries or in the creation of new lines of production. This applies equally to whether the capital is released from the sphere of productive-capital, or capital in circulation. The increased mass of surplus value produced, by this same level of advanced capital, therefore, results in a rise in the rate of profit. 

However, this release of capital has other consequences. The greater the mass of profit produced, the greater the potential money-capital available, via the money-market, as loanable capital. The consequence is that the increased supply of loanable capital causes interest rates to fall. This is true whether the realised surplus value is used internally, by companies, to finance their requirements, thereby reducing demand for loanable capital, in the money-market, or whether these funds are deposited by firms in banks, and so increase the supply of loanable capital. On the other hand, as Marx sets out in Capital III, Chapter 21, the demand for loanable capital is itself a function of the rate of profit, because the higher the rate of profit, the more there will be a demand for capital to be used to produce such profits. The rate of interest will then be a function of these two contradictory forces, but also of the stock of loanable capital, which itself will be a function of the size and wealth of the class of rentier capitalists. 

To the extent, therefore, that the rise in social productivity, which leads to the tendency for the rate of profit to fall, also leads to a release of money-capital, and increases the supply of money-capital relative to the demand for money-capital, interest rates will fall. The more interest rates fall, and consequently the less of a deduction of interest from the total realised profits, the higher the realised rate of industrial profit, enjoyed by productive and merchant capital. The same applies in relation to rent, but with the necessary modifications, as described in Part 2.

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Forward To Part 53

Another 2008 Is Inevitable - Part 1 of 5

It is the best of times, it is the worst of times; there is great wealth, there is great poverty; there is reduced inequality, there is greater inequality; there is inflation, there is deflation; there is falling unemployment, there is rising unemployment; there is huge debt, there is huge saving; there are very low interest rates, there are astronomically high interest rates; interest rates are falling, interest rates are rising.

The world has never had more wealth than it has today. For a Marxist, wealth is measured by the quantity of use value that exists, and that are being produced. As Marx puts it, a society that can produce two pairs of trousers, is twice as wealthy as a society that can only produce one pair, even if the value of the two pairs is no more than the value of the one pair. Of all the goods and services (use values) produced in Man's entire history, nearly 25% were produced in the first ten years of this century. The reason for this huge rise in global wealth is that from around 30 years ago, there was a massive rise in productivity. That rise was driven by the development of the microchip. The microchip was the base technology which not only increased, in geometrical progression, the processing power of computers, which in turn made possible the performance of analysis in a range of other fields such as genetics, which transformed technology in these other fields, it also made possible, a range of other technologies, such as the Internet, mobile communications and so on which revolutionised technology across almost all sectors of the economy.

Like the situation Marx describes with the trousers, this huge rise in wealth does not mean the same rise in value. The huge rise in productivity means a huge fall in the individual value of each commodity produced. This is the basis of the deflation of commodity prices seen over the last thirty years, not a lack of demand for those commodities, as the Keynesians and Monetarists believe. 

The price of commodities is merely an expression of the relation between two values – an exchange value of one expressed in a quantity of the other use value. As a result, price can change as a result of a change in the value of one or both use values on either side of this equation. If the value of commodities falls, but the value of money remains constant, then prices fall, and vice versa. But, if the value of commodities falls by 50%, and the value of money also falls by 50%, prices remain constant, because both sides of the equation have been changed by the same proportion.

The massive increase in money printing that began in the 1980's, but which increased qualitatively after 2008, brought about a significant fall in the value of money – actually money tokens, but for simplicity money tokens are referred to as money here. Because the dollar acts as world reserve currency, it meant a fall in the value of world money, in the same way that in the past, that happened whenever the value of gold fell – for example, because of the Californian gold rush. The fall in the value of money hid the fall in the value of commodities, so that it appeared as moderately rising prices.

But, not everything that has a price has a value. Land has a price, it is bought and sold as a commodity, it is rented for varying durations. Yet, land has no value, it was not produced by labour; more of it cannot be created by the expenditure of labour. Similarly, money-capital is bought and sold as a commodity in the money market. Its price is the rate of interest. Yet, this money-capital has no value. Like land, it was not produced by labour. Its price is determined solely by the interaction of supply and demand.

So, its clear that the value of these commodities – land and money-capital – cannot be determined by changes in productivity, as is the case with every other commodity; half of zero is still zero. If the value of money is halved, therefore, so that the price of all other commodities remains constant, when their own value halves, the price of land and money-capital must double, ceteris paribus. In the case of land, there has been a massive increase in its price, and an attendant rise in ground-rent. But, if the price of money-capital is the rate of interest, the fall in interest rates seems to contradict that. In fact, there is no contradiction, as will be explained later.

Capital as a commodity, loanable money-capital, is not really capital, as Marx sets out in Capital III, Chapter 25. It is fictitious capital, or at least part of it is. This capital appears to divide in two. If A lends £1,000 to B, who is a productive-capitalist, and B uses it to buy a machine, then A no longer has the £1,000 of loanable money-capital. In fact, B no longer has it either, but they do have £1,000 of productive-capital, in the form of a machine. It is the fact that the machine as real, productive-capital can expand its value, via the production process, that means that B can pay A an amount of interest. If the average rate of profit is 10%, B makes £100 profit. They may then be able to pay a 2% interest on the borrowed money-capital. Had the productive-capital not expanded, then B could only have repaid the sum borrowed, not the interest.

A's £1,000 of money-capital appears to have acted as capital, to have self-expanded by £20, only because it acted as real capital in the hands of B, where it expanded by £100. But, it appears from the transaction, that the amount of capital in existence has doubled, as a result of the loan. B acquired capital of £1,000 in the form of the machine. At the same time, A now has in his possession, a certificate saying that B owes him £1,000 plus £20 interest. For A, this certificate appears to be capital. It can be used as collateral so as to borrow money, for example.

However, as Marx points out, the only real capital here is that in the form of the machine. If A were to try to realise their capital, by calling in the loan, it could only be done by B selling the machine, for example to A. In that case, the “capital” in the form of the loan certificate melts into the air, because the loan no longer exists. In place of the loan, A now has a machine with a value of £1,000. The capital exists only in the form of the machine, despite the appearance. A's certificate is not capital. It is only fictitious capital.

But, this situation is what exists when money-capital is loaned to buy productive-capital, via the issuing of shares or bonds. The capital appears to have doubled. On the one hand it appears as the real capital, in the shape of factories, machines, material and labour-power bought with the money raised from selling shares; on the other it appears as share capital in the hands of those who bought the shares, and thereby loaned money-capital, for the purchase of that productive-capital.

The share and bond certificates are not real capital, but only fictitious capital. The real capital exists in the form of the productive-capital, bought with the money-capital loaned in exchange for stocks and bonds. The owners of those stocks and bonds, as loanable money-capital, obtain interest on them – dividends in the case of shares, coupon payments in the case of bonds. But, as set out above, this interest can only be paid in so far as the productive-capital itself produces a surplus value.

But, for a great amount of the fictitious capital that has been created, there is no productive-capital standing behind it, producing surplus value. For example, if a bank lends £1,000 to A, to buy a house, to live in, the house is not productive-capital. It cannot self-expand in value, because it does not take part in the production process so as to make profit. The land on which it sits may see its price rise or fall for the reasons set out, at the beginning, but the only thing about the house which has value, is the building itself, because only it is the product of labour. Yet, like every other commodity, the value of the building will fall not rise over time, because as productivity rises, so that less labour-time is required for its production, so its value is reduced. The only way its price can rise, as set out earlier, is if the value of money is depreciated by a greater proportion than the fall in the value of the building.

Yet, in the US, UK, parts of Europe and Asia, vast amounts of money-capital has been loaned, by banks, for the purchase of property. The banks, who loan it, expect to be paid interest, as though this money-capital had been used to buy productive-capital, and thereby produce profits, even though it is impossible for this property to produce any surplus value. This is fictitious capital in a double sense of the term, therefore. On the one hand, the loan capital itself is fictitious, but, in addition, the underlying asset itself, is fictitious, it cannot act as capital by creating a profit.

Marx points out, in the chapter referred to earlier, that a large quantity of the bonds, purchased by the banks, are also of this nature. Bonds, issued by the state, are not issued for the purchase of productive-capital. Short term bonds are purchased to fund its revenue expenditure, and longer term bonds finance longer term spending, for large projects, such as the building of roads, dams and so on. The interest paid to the banks by house buyers can only be paid out of their wages, thereby reducing wages below the value of labour-power, which cannot persist for long periods. Ultimately, wages adjust, on average, to the value of labour-power, so the interest paid, is actually a deduction from the total surplus value produced by productive-capital. The interest paid by the state, comes from the taxes it collects, which again ultimately amounts to a deduction from the total surplus value produced in society. This is why, as Marx sets out, the interests of the money-capitalists are ultimately antagonistic to the interests of productive-capitalists.

But, this illustrates one of the basic contradictions, described at the beginning, which make another 2008 inevitable. In fact, it is the fundamental contradiction, which makes such a financial crisis inevitable. On the one hand, all of the loaned money-capital appears as huge amounts of savings, of apparent wealth in the form of highly valued financial assets, hugely inflated stock, bond and property markets, but this wealth is entirely fictitious. On the other side of this, its equivalent is huge amounts of debt – sovereign debt built up by some states such as the US, UK, peripheral Europe etc., as well as private debt in the form of mortgages, credit card debt, student debt etc. But, nearly all of the assets used as collateral for this debt is fictitious too.

I will examine this further in Part 2.

Northern Soul Classics - Ever Again - Bernie Williams

Back to 1975, and a monster Northern Dancer from Bernie Williams, also covered by Gene Woodbury.

The Law Of The Tendency For The Rate of Profit To Fall - Part 51

Transformation Of the Nature of Labour (3) 

In Part 50, the consequence of a change in the nature of labour within a given industry was examined. On the one hand, technological development creates a requirement for more technologically advanced, better educated and cultured workers. On the other hand, the means of subsistence required to produce such workers necessarily expand, and become more varied with its own effect on the value of labour-power, reflected in its historical and cultural component. But, this is separate from the change in the value of the product of this labour, which itself is a function of the use value of this labour, the fact that its nature as concrete labour is transformed, so that even the unskilled and semi-skilled labour may appear as complex labour compared to past labour.

But, more significant, perhaps, is the fact that alongside the technological development of capitalism, which is the basis of the process which leads to the tendency for the rate of profit to fall, goes also a transformation of production and consumption itself. As Marx describes, this process necessitates the continual development of new use values, and new industries producing these use values. It requires new types of concrete labour to be developed to produce these new types of use value, and frequently in these new lines of production, not only is it the case that the organic composition of capital is low, but part of the reason for this is that the nature of the concrete labour employed is that it is more skilled. This is particularly, the case, as has been suggested, in relation to many of the new industries today, in the realm of software design, computer games development and so on.

It is the case, as was suggested also, in those new industries, that have become increasingly significant, in the modern economy, in the realm of service production, for example, high quality restaurants, entertainment, fashion design and so on.  But, the recent attempt by Pfizer to take over Astra-Zeneca illustrated the number of very highly skilled workers who are today employed in the high value production area of pharmaceuticals, and many more are employed in the growing areas of biotechnology, gene technology and so on. Marx indicated the extent to which this also applied in relation to the realisation, rather than production, of surplus value in relation to commercial workers. There is, perhaps, no better illustration of that, today, than the vast profits realised by the financial services industry, despite the very high wages paid to some of the very complex labour employed within it.

This indicates how a relatively small, but rapidly growing number of workers, whose labour is highly complex, can represent a massive amount of abstract labour-time in the modern economy, which acts to validate equally large amounts of capital in existing industries. The value, created by this smaller number of highly skilled workers, in these sectors, can thereby exchange against the value produced by much larger numbers of workers, employed in the older industry sectors, including the revenue that can then be spent in a range of retail venues, thereby enabling workers, employed by this merchant capital, to realise large amounts of surplus value, out of which their own wages are paid. The very high value production of workers, in a range of new industries, means that, despite relatively high wages, these industries can produce large amounts of surplus value, and experience high rates of profit, which, thereby, raises the general annual rate of profit. In addition, as Marx sets out in Capital III, Chapter 17, the general annual rate of profit is not simply a question of the surplus value produced, but of the profit realised, which is also a function of the ability of commercial capital, to reduce costs, and increase the rate of turnover. The more effective, the complex labour employed by merchant capital and money-capital, in the process of circulation, the more the actual realised rate of profit rises, because the mass of realised profit rises relative to the total capital advanced.

Examples of this process were outlined in Parts 13,20 and 29. 

In fact, this very process can be seen as also a necessary consequence of the very process of capitalist production. The basis of the tendency for profit margins to fall, as Marx outlines it, in Chapter 13, and for the organic composition of capital to rise, is based on the need to continually reduce the value of commodities so that each individual capital can gain market share, and thereby win the battle of competition. But, the more this process develops, the more the reduced number of productive workers must themselves become more technologically competent, better educated etc. Moreover, this very process increases the mass of commodities to be circulated, which then increases the mass of labour that must be employed in that process, and these workers, as Marx sets out, tend to be those that require greater skill, and whose labour is complex. 

But, there is another aspect to this, which is that the more many of these basic commodities become produced on a mass scale, and the individual value of these commodities falls, the more all workers can satisfy their requirements for these commodities. In fact, as Marx sets out, it is this basic contradiction that production can expand the quantity of these use values, more or less without limit, whereas the demand for these commodities can only expand within very defined limits, which tends to result in market prices falling below prices of production, and costs of production, that leads to crises of overproduction. It is in order to resolve this contradiction, that capital must continually develop new use values, so as to extend the market.

However, the more the demand and even the need, for an increasing number of these basic commodities is satisfied, the more the range of use values that consumers are persuaded to consume, the less the requirement is that these additional use values have to be produced as commodities whose value is ever lower. On the contrary, it has always been the case that for the rich, a factor in buying luxury goods, was not that they were cheap, but that they were expensive, that, as a result, they were more exclusive, and represented higher quality. In other words, for many new commodities, at least initially, the determining factor is not that their value must be minimised, but their quality, or appearance of quality, should be high.

For a whole range of these commodities, therefore, and this can be seen with the growth of designer labels, high priced restaurants, very high-priced coffee shops and so on, it is not the ability to reduce prices that is decisive in winning market share, but the perception of quality, which tends to be a reflection of the quality of the labour employed, rather than the constant capital employed, even if that labour is not particularly highly paid. It has always been the case, for example, that luxury jewellery had a high value, because it was produced by skilled craftsmen rather than machines. What the craftsmen themselves were paid, by the capital that employed them, was irrelevant to the value it created as complex labour.

It is no surprise that, in Britain, there was a call for 50% of people to go to University, and there are similar calls in the US and elsewhere. This is simply an extension of the principal set out by Marx, above, in relation to commercial workers, that capital seeks, by such methods, to continually increase the value of the product of labour, whilst minimising the value of the labour-power itself.

Back To Part 50

Forward To Part 52

Capital II, Chapter 20 - Part 12

The exchange of Department 1 (v+s) with Department 2 (c) has been explained, but within this there is the exchange of 1(s) with 2a and b. Department 1(v) will only have been exchanged with Department 2a necessities. But, in the same way, the portion of value comprising 1(s) within 2(c), can be divided 60:40 in the same way as with Department 2(s).

Our model is:

Department I - c 4000 + v 1000 + s 1000 = 6000

Department II - c 2000 + v 500 + s 500 = 3000

So, the Department 2 constant capital was 2000. The constant capital value itself forms part of the total value of Department 2 production. Workers in Department 1 only buy necessities and so their £1000 is used to buy commodities from 2a to that amount. Capitalists from 2a use this to buy £1000 of constant capital from Department 1 capitalists. The wages paid by Department 1 capitalists have then returned to them in money form, available to buy labour-power once more.

The more detailed model is then:

Department I - c 4000 + v 1000 + s 1000 = 6000

Department IIa (Necessities) c 1600 + v 400 + s 400 = 2400

Department IIb (Luxuries) c 400 + v 100 + s 100 = 600

Department 1 capitalists allocate their surplus value 60:40. They spend £600 on necessities with 2a. 2a capitalists use this to buy £600 of constant capital. Department 1 capitalists then have £600 returned to them, of the £1,000 they have thrown into circulation, to cover personal consumption. They also spend £400 buying luxuries, from 2b capitalists, who use it to buy constant capital. Department 1 capitalists then now have all of the £1,000 thrown into circulation to cover personal consumption returned to them, which is now available for them to spend again in the next cycle.

“What is arbitrary here is the ratio of the variable to the constant capital of both I and II and so is the identity of this ratio for I and II and their sub-divisions. As for this identity, it has been assumed here merely for the sake of simplification, and it would not alter in any way the conditions of the problem and its solution if we were to assume different proportions.” (p 411)

Marx draws 2 conclusions.

1. The new value, created in Department 1, in a year, i.e. v+s, in the form of means of production, is equal to the means of production, consumed by Department 2, and thereby transferred to the value of its product.
   “If it were smaller than IIc, it would be impossible for II to replace its constant capital entirely; if it were greater, a surplus would remain unused. In either case, the assumption of simple reproduction would be violated.” (p 411)
   
   
2. Workers producing luxuries in Department 2a can only transform their wages into necessities to the extent that capitalists producing necessities use an equal amount of their surplus value to buy luxuries. That proportion must be smaller than 2a surplus value.
   
   These proportions, though variable are determinant, because the above has demonstrated that output from one department, or subdivision of one department, can only be fully exchanged if the output from the other department or subdivision is in the corresponding proportion.

“It goes without saying that this applies only to the extent that it all is really a result of the process of reproduction itself, i.e., to the extent that the capitalists of IIb, for instance, do not obtain money-capital for v on credit from others. Quantitatively however the exchanges of the various portions of the annual product can take place in the proportions indicated above only so long as the scale and value-relations in production remain stationary and so long as these strict relations are not altered by foreign commerce.” (p 412)

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