Bank of England Says Keep Gambling

The real message of the Bank of England's Monetary Policy Committee today was "Keep Gambling"!  It was a message to all those who see their personal wealth increasing as a result of obtaining capital gains from rises in share prices, bond prices or property prices, rather than from engagement in productive activity, that the Bank still has their back.  Similarly, it was a message to all those who do depend upon productive activity to provide them with revenue, as the basis of their personal wealth, that the Bank of England will continue to make life difficult for them, in order to protect the paper wealth of the gamblers.

For a worker putting a few pounds away each month into a pension fund, it means the astronomically inflated prices of shares and bonds will continue to be propped up by the Bank of England, so that their pension contributions buy fewer of those shares and bonds, to provide them with the future revenues required to cover their pension when they come to retire.  For the same worker saving to buy a house, or to be able to move up to a better house, it means their hopes will be dashed as the Bank does all it can to keep house prices high, and if possible rising, so their workers savings and wages continue to lag behind the rise in house prices, sending them further and further out of the reach of more and more workers.

At the same time, it means that their demand for rented property will push up rents even further, whilst landlords will continue to be subsidised to the tune of £9 billion a year in Housing Benefits, as more and more workers, whose wages fail to keep up with the costs of shelter have to rely on it.  And, as the state provides that Housing Benefit subsidy to landlords out of taxes, it means ultimately that this growing unproductive section of society, drains surplus value from the productive sector of society, thereby holding back economic growth further.  And, that is part and parcel of what the Bank of England along with other central banks has been trying to do for the last 10 years.  They have sought to hold back economic growth, and to divert available money-capital into gambling on stock, bond and property markets, so as to limit the demand for labour-power and rise in wages, and subsequent squeeze on profits, and rise in interest rates which will crash asset prices, and the paper wealth of the top 0.01%.  It was that rise in the demand for labour-power, rise in wages, and rise in interest rates in 2007/8, which sparked the financial meltdown of 2008.

But, however much the Bank of England, the ECB and other central banks try to maintain the delusion that wealth can come from gambling rather than the production of wealth, by the creation of new value by labour, it can't, and reality is imposing itself.  The action of central banks in trying to perpetuate that delusion was illustrated a few years ago by BoE Chief Economist, Andy Haldane, who described the fact that, in the 1970's, only around 10% of profits went to fund dividends, whilst today that figure is around 70%.  Yet dividend yields have continued to drop, as have bond yields and rental yields, because the prices of shares, bonds and property have been pushed up astronomically as a result of all this gambling, based not upon deriving a yield, but in obtaining large capital gains from those asset price rises.

Its notable that, at today's meeting, Haldane joined the 2 "hawks" on the MPC, in proposing a rate rise from 0.5% to 0.75%.  But, its difficult to describe anyone on the MPC as a "hawk" given the continuation of these low rates for so long, and given that at its meeting today it confirmed that it will not even start to unwind the stock of bonds taken on to its balance sheet, as a result of QE, until bank rate has reached 1.5%.  Even that was a more "hawkish" stance than its previous suggestion that such unwinding would not occur until bank rate hit 2.0%.

To any business thinking of investing in actual productive capacity, the Bank of England was basically saying, "don't bother, you can make more money from using your profits to speculate in your own share price."  And, by pushing up asset prices, in conditions where employment is rising, and where workers will increasingly be able to demand pay rises to compensate for rising prices and other costs, it was also saying to businesses, "better not invest in productive activity that might result in you having to pay higher wages, to cover higher pension costs, higher house prices, higher rents, higher taxes to cover Housing Benefits and so on, its much easier for you to just keep gambling, whilst we have your back, in making those bets."

But, the fact is that employment has been rising, and as a result, even whilst wages per worker haven't risen much, wages in total have risen, precisely because more workers are employed.  David Blanchflower speaking on Bloomberg ahead of the MPC decision got it nearly all totally wrong.  He's right that the level of full employment today should be seen as around 2.5%, and not 4.0%.  That simply means that we are back at the same kind of conditions that existed in the early 1960's.  But, he is wrong on two more important counts.  Firstly, he's wrong, in thinking that a lower bank rate is needed to stimulate the economy.  It won't.  For the reasons set out above, it does the opposite.  It encourages money-capital into speculation, and away from productive investment, thereby slowing capital accumulation, and employment growth.  Secondly, he is wrong in focussing on wage levels rather than the total wage share, i.e. taking into consideration the growth of employment as well as wages.

If 10 people are employed on wages of £100, the total wage bill is £1,000, and the result is £1,000 of demand for wage goods.  If 50 people are employed on wages of only £50, the total wage bill is £2,500, creating demand for £2,500 of wage goods.  Where the demand for wage goods rises, firms are thereby incentivised to satisfy that demand.  They know that if they do not, their competitors will.  Even if they make a lower rate of profit from such investment, they are thereby still incentivised to invest to meet that demand.  Firstly, if they don't their competitors will, and they will lose market share.  Secondly, even if the rate of profit they make on this additional output is lower, the total profit they obtain will be greater, because it is on a greater mass of output.

As employment is rising across the globe, even if wages stay the same, the total wage bill necessarily rises, and the demand for wage goods necessarily rises with it.  That means that firms have to invest in additional productive-capital to meet that demand, for fear of losing market share.  That is why, despite central banks trying to do all they can to encourage money into financial speculation to keep asset prices inflated, whilst yields linger near zero, business are forced by the laws of economic to accumulate capital so as to meet this rising demand for wage goods, and that sets in motion a feedback loop.  As those firms invest to meet that increased demand, especially in conditions of sluggish productivity growth, it means they take on even more labour, and the firms that supply them with inputs, also take on more labour, so that employment rises further, the total wage share increases further, and the demand for wage goods increases once again.

For thirty years, in the UK and US in particular, firms were encouraged to use their resources for speculation.  Money that could have gone into education and training went instead into progressively increasing dividend payments, subsidising landlords via Housing Benefits and gambling on share, bond and property prices.  Workers instead of seeing their future depending upon higher wages from higher education and skills, were encouraged to see it coming from gambling on higher house prices that in reality made them poorer, and only enabled them to go into more debt to cover their consumption, as their wages failed to keep up.

The Bank of England is trying to keep that delusion alive, even as it falls in atters around their feet, and as some of their more far sighted members have begun to recognise and respond to.  But time has run out for them.  The more they procrastinate, the more they put themselves behind the curve, divorced from the encroaching reality, and will be swallowed up by the enormity of the events about to unfold.

Theories of Surplus Value, Part II, Chapter 16 - Part 28

[e) Ricardo’s Explanation for the Fall in the Rate of Profit and Its Connection with His Theory of Rent]

Marx begins this section with a very long quote from Ricardo, where Ricardo sets out his argument for the tendency for the rate of profit to fall. Ricardo says, 

“With the progress of society the natural price of labour has always a tendency to rise, because one of the principal commodities by which its natural price is regulated, has a tendency to become dearer, from the greater difficulty of producing it. As, however, the improvements in agriculture, the discovery of new markets, whence provisions may be imported, may for a time counteract the tendency to a rise in the price of necessaries, and may even occasion their natural price to fall, so will the same causes produce the correspondent effects on the natural price of labour.” (p 461) 

In other words, food becomes dearer, because, as the population grows, cultivation moves to less fertile land, so the price of food and raw materials rise. Improvements in agriculture, and cheaper imports only affect this temporarily. However, rising productivity in manufacturing reduces the value of all other commodities, and to the extent these comprise workers' necessaries, this reduces the value of labour-power. But, as population rises, the fall in the value of these manufactured necessaries does not offset the rise in food prices. Ricardo continues. 

“Instead, therefore, of the money wages of labour falling, they would rise; but they would not rise sufficiently to enable the labourer to purchase as many comforts and necessaries as he did before the rise in price of those commodities… 

“Notwithstanding, then, that the labourer would be really worse paid, yet this increase in his wages would necessarily diminish the profits of the manufacturer; for his goods would sell at no higher price and yet the expense of producing them would be increased…” (p 461) 

So, Ricardo's explanation of the falling rate of profit is a squeeze on profits themselves. On the one hand, rising agricultural prices cause rising rents, which take a chunk out of profit, on the other, although workers' pay rises do not cover the full cost of the rises in their food bill, so their living standard drops, the rise in their money wages still takes another chunk out of profits, so that profit is squeezed from two directions. 

Whilst workers lose out, because the rise in their money wage is not enough to cover the rise in food prices, the landlord is protected. Ricardo says, 

“The rise in the money value of rent is accompanied by an increased share of the produce; not only is the landlord’s money rent greater, but his corn rent also” (p 462) 

Ricardo's quote ends with the following. 

““We have shewn that in early stages of society, both the landlord’s and the labourer’s share of the value of the produce of the earth, would be but small; and that it would increase in proportion to the progress of wealth, and the difficulty of procuring food” (l.c., p. 109).” (p 462) 

Marx responds, 

“These “early stages of society” are a peculiar bourgeois fantasy. In these early stages, the labourer is either slave or self-supporting peasant, etc. In the first case he belongs to the landlord, together with the land; in the second case he is his own landlord. In neither case does any capitalist stand between the landlord and the labourer. The subjugation of agriculture to capitalist production, and hence the transformation of slaves or peasants into wage-labourers and the intervention of the capitalist between landlord and labourer—which is only the final result of capitalist production—is regarded by Ricardo as a phenomenon belonging to the “early stages of society”. (p 462) 

Back To Part 27

Forward To Part 29

Theories of Surplus Value, Part II, Chapter 16 - Part 27

[d) Historical Illustration of the Rise in the Rate of Profit with a Simultaneous Rise in the Prices of Agricultural Products. The Possibility of an Increasing Productivity of Labour in Agriculture]

Marx begins this section by making the point he set out in Capital III, that, in reality, it is not a matter of land cultivation proceeding from the most fertile to the least fertile, or vice versa, but that both of these exist together, and are intertwined. 

“But it cannot by any means be said that if for individual short periods (such as 1797–1813) the descending line clearly predominates, that because of this, the rate of profit must fall (in so far, that is, as the latter is determined by the rate of surplus-value). Rather I believe that during that period, the rate of profit in England rose by way of exception, despite the greatly increased prices of wheat and agricultural produce generally. I do not know of any English statistician who does not share this view on the rise in the rate of profit during that period. Individual economists, such as Chalmers, Blake, etc. have advanced special theories based on this fact. Moreover I must add that it is foolish to attempt to explain the rise in the price of wheat during that period by the depreciation of money. No one who has studied the history of the prices of commodities during that period, can agree with this. Besides, the rise in prices begins much earlier and reaches a high level before any kind of depreciation of money occurs. As soon as it appears it must simply be allowed for.” (p 460) 

The explanation of the rising rate of profit, during this time, Marx says, is due to a number of factors. Firstly, this is a period when machinery starts to be introduced on a large scale, and along with the machinery came a prolongation of the working-day, which brought about a rise in absolute surplus value. Secondly, although agricultural prices were rising sharply, the very advance of machine industry reduced the price of the manufactured goods that workers had to buy, and imported commodities, from the colonies, also reduced the value of wage goods, and so labour-power, increasing relative surplus value. But, also, in addition to the fall in the value of labour-power, although nominal wages rose, real wages were pushed below the traditional value of labour-power. 

“... this fact is acknowledged for that period; J. P. Stirling in The Philosophy of Trade etc., Edinburgh, 1846, who, on the whole, accepts Ricardo’s theory of rent, seeks, however, to prove that the immediate consequence of a permanent (that is, not accidental, dependent on the seasons) rise in the price of corn, is always reduction in the average wage”. (p 460) 

Another factor, Marx says, is the effect of the rise in nominal prices, in other words, inflation. The process that Marx describes here is that the expansion of bank credit, and of government expenditure, increased the demand for money-capital faster than the increase in supply. That causes market rates of interest to rise. However, all of those landlords who have rented land to farmers, are stuck with a fixed level of rent, until the end of the period of the lease. Similarly, those rentiers who have bought longer term bonds, are stuck with a fixed amount of coupon. In effect, what capital pays back to these landlords and other rentiers, from profits, falls in real terms, as inflation rises, leaving a larger proportion of nominal profits after the payment of rent and interest, i.e. profit of enterprise. 

Marx concludes this section with a quote from an unknown source, which demonstrated the way agricultural productivity could be raised by crop selection. It concerned an exhibitor at the Great Exhibition, in 1862, called Mr. Hallett. He showed how by breeding the best ears of wheat from his crop, over several years, he had been able to lengthen the ears, on each stalk, and to increase the number of grains produced by each ear. 

“He asserts that the corn produce of England may be doubled by adopting ‘pedigree wheat’ and the ‘natural system’ of cultivation. He states that from single grains, planted at the proper time, one only on each square foot of ground, he obtained plants consisting of 23 ears on the average, with about 36 grains in each ear. The produce of an acre at this rate was, accurately counted, 1,001,880 ears of wheat; while, when sown in the ordinary fashion, with an expenditure of more than 20 times the amount of seed, the crop amounted to only 934,120 ears of corn, or 67,760 ears less…” (p 461) 

Back To Part 26

Forward To Part 28

Paul Mason's Postcapitalism - A Detailed Critique - Chapter 1 (6)

CHAPTER 1 – NEOLIBERALISM IS BROKEN

The Imbalanced World 

Paul argues that Neoliberalism, in some countries, is only possible, because other countries don't practice it. What he means is that the US, UK, et al can only borrow to consume because China et al, produce and sell rather than consuming, and so are able to save. This is wrong. Marx showed, in Capital II, what is wrong with this idea. The argument that Paul presents is essentially mercantilist. Instead of considering two countries, consider two companies, A and B. A produces commodities, and B produces gold, which is also the money commodity. A and B both produce a surplus product/surplus value. B needs to buy commodities for its workers and capitalists to consume, and to replace those used in mining, and refining the gold. It buys these from A, and A thereby acquires gold to an equal value of the commodities it supplies. B has thereby reproduced its means of production, and means of consumption (constant and variable capital). But, it also produces a surplus, and it exchanges some of this surplus with A, thereby providing the commodities capitalist B needs to consume (or to enable accumulation). B capitalists retain the rest of their surplus as a gold hoard. A capitalists also produce a surplus. They consume some of it to meet their consumption needs (or accumulate), and exchange the rest with B, as described above, so that they too now have a portion of their surplus value in the form of a hoard of gold/money. 

To the extent that such trade facilitates a division of labour, rise in productivity, rise in the rate of surplus value, and capital accumulation, it benefits both parties. There is no reason that such an imbalance had to arise, or that its removal represents a fundamental problem. On the contrary. Ultimately, the problem will be for China, if the US defaults, just as it will be for Germany, if the Eurozone falls apart, and just as it was for Lehman's et al, when all of those subprime mortgages went belly up. 

It was the twin deficits crisis, in the 1980's, sparked by Reagan's Voodoo Economics, that led to the 1987 stock market crash. I left out the 1987 crash, earlier, precisely because it was different to 1847 and 1857, and 2000 and 2008. Those crashes came in the early periods of economic boom, when the expansion caused interest rates to rise. 1987 came at the end of a period of crisis, and start of a period of stagnation, when interest rates had already peaked. It was that which spooked Greenspan and Co., and led to them embarking on their 30 year programme of keeping those asset prices inflated. 

Trump is applying the same Voodoo Economics, and blowing up this Twin Deficits Crisis 2.0. At the same time, he is disrupting global capital with his economic nationalism, and inane tweets. He is doing so in conditions opposite to those of 1987. In other words, global growth is rising, global interest rates are rising sharply from their near zero levels, and so creating the conditions for a never seen before collapse in asset prices. Just as the long wave cycle produced a thirty year secular down trend in interest rates, and rise in asset prices, so now the conditions are set for a thirty year move in the opposite direction. 

Paul is right to note that the world is made up of “classes, religions and nations” (p 22), and he could have included other important interest groups, such as nation state bureaucracies, and so on, as I've done in considering relations in the EU, and elsewhere. These various cleavages mean that the implication of policy prescriptions affect different sections of society differently. 

The dominant sections of the ruling class – which is not at all the same thing as the majority of the ruling-class, which consists of the millions of small capitalists – did not want Brexit, nor Trump, but they have got them, as the inevitable consequence of the Neoliberal policies adopted over the last thirty odd years. The same is true of the rise of the right-wing nationalists in Hunagry and Poland etc. Back in 2015, I wrote that Syriza could not bend; if it did the consequence would be its demise, and the rise of Golden Dawn. Well Syriza did bend, then it split, and now it is facing electoral defeat. Fortunately, as the EU economy recovers, and action by the ECB, via QE, along with the effective writing off of Greek debt, means that Greek bonds today trade at not much higher yields than UK Gilts, its not Golden Dawn waiting to take over the government, but the same old conservatives that created the problem in the first place. 

A look across Europe can present a depressing picture, with Brexit, the support for Le Pen, Wilders, Orban and their ilk. But, a look beneath the surface shows that Le Pen did not win; Macron provoked a large active abstention, and his Blairite policies are provoking a response from French workers. Large numbers of Polish workers are returning home, as the economy grows, and the reality will increasingly bring those workers into conflict with the government. In the same way that Brexit provoked a response in Britain, and Trump's election has prompted a response, and growth of activism, at the base of the Democrats, so too such a reaction is likely across Europe. This is not the 1930's, nor the 1980's; it is more like the 1950's, or early 1960's, and the underlying uptrend of the long wave will manifest itself in a similar way.

The Info-Tech Revolution 

Paul says, 

“The one positive factor to set against all the negatives outlined so far is the tech revolution, which was produced by Neoliberalism and has stormed ahead in defiance of the economic crisis.” (p 23) 

To be honest, I think this is back to front. The Tech Revolution precedes Neoliberalism. As with all long wave cycles, the drive for technological innovation arises during the crisis phase, as capital seeks to address high wages, and labour shortages that provoke repeated crises. That is the case from around 1974 onwards. The innovation peak, in terms of this drive, and the development of new base technologies – not the roll out of those technologies – came around 1985. It is the development of the microchip, of the development of things like computer typesetting, desktop printing, photocopiers, and so on, which destroyed many bastions of skilled workers power. 

In the mid-1980's, I was self-employed as an IT consultant, at a time when the kind of machines my father had worked on as an engineer were being converted to computer controlled machines, running off punch cards. A comrade of mine, at the time, who was a technical author with ICL, came with me to the Which Computer Show, at the NEC, where I was impressed by some of the CAD/CAM machines being demonstrated. “That's nothing,” he told me, even back then, “I'm working on programmes that will actually produce the programmes that control the machines.” 

It was this technical revolution that meant that labour was undermined, workers struggles doomed, so long as they remained merely distributional struggles, at the industrial level, and which created the conditions for the huge rise in the rate of profit, which also created the conditions for the progressive fall in interest rates, rise in asset prices and expansion of credit based upon it. 

The development of networked PC's, the developments in telecommunications etc. opened the door for large companies to operate on a modular basis. It facilitated electronic payments and credit – the ATM would have been impossible without the microchip, as effectively would have been the credit card and store card etc. It facilitated the introduction of Just In Time and Flexible Specialisation, and its unlikely that the shift of large amounts of production to Asia itself would have been possible without it. 

Floridi's description of the rapid pace of IT development is, in fact, no different to Marx’s description of the rapid pace of machine production, in the 19th century, when he says, machines were often scrapped, even before their production had been completed, because they had already become out of date. I was considering the situation the other day in relation to media production. We have seen the cost of equipment fall massively, as a consequence of this technological development. Paul himself is an example of how this development enables even individuals to become their own producer of media, available to a mass audience. In fact, it has promoted a rapid growth of such independent production. But, it occurred to me that Marx describes a similar situation, in the 19th century, when cheap, efficient sewing machines became available. A plethora of self-employed seamstresses sprang up, all enabled to work from their own homes. The inevitable consequence was that, in competition with each other, the market could not sustain all of them, and they were forced to charge a pittance for their products, rather like the situation that faced the Scottish pebble collectors. A similar situation exists with Uber drivers. As I've written on that, it illustrates the importance of forming a co-operative, and I'm glad to see that Paul has been promoting that solution too. 

The network effect that Paul refers to, whereby the more people networked together, for example, on a telephone system, is in reality nothing new. As Marx points out, networked labour, i.e. co-operative or social labour, also produces something for nothing, by which he means in addition to the unpaid labour of the worker. 

Paul argues that this information revolution creates a challenge to capitalist property, because it can't make the necessary calculation of values, and “is the root cause of the collapse, fibrillation and zombie state of Neoliberalism.” 

I disagree. Marx demonstrates the way land has no value, and yet is sold as a commodity; capital has no value, and yet is sold as a commodity. The price of land is capitalised rent, and the price of capital is the rate of interest. And, ever since stock markets arose, stocks and bonds themselves have been bought and sold as commodities, even though they have no value, their prices determined on the basis of the intersection of supply and demand. 

Neoliberalism has collapsed because asset prices were driven higher at the expense of actual capital accumulation. Reality, and the ultimate predominance of industrial capital has simply and inevitably reasserted itself. 

I will conclude the analysis of this chapter, in part 7.

Back To Part 5

Forward To Part 7

Theories of Surplus Value, Part II, Chapter 16 - Part 26

If a new capital engaged in this production, with only £100, as was the case initially, moreover, it would be able to buy physically less seed, and labour-power, than a capital of £100 could previously achieve. This is why Marx set out in Capital II, that the circuit M – C...P...C` - M`, only applies to such new investments of money-capital, whereas for all existing capital, the circuit is rather P...C` - M`. M – C...P. 

In other words, every existing capital starts its circuit with a quantity of productive-capital, and the value of that capital (its current reproduction cost) is thereby reproduced, in the value of its output, and in this context, the M in this circuit represents only the money equivalent of the current value of the commodities consumed in the production process.  As Marx puts it, money here only acts as a unit of account.

If previously £100 bought 60 tons of seed, and 40 workers, but now the price of seed rises, less seed can be bought, but also less labour-power. So, maybe only 45 tons of seed and 30 workers are employed. But, for this new capital, the 30 workers will now produce only 75% of the new value that previously 40 workers produced, and they will produce proportionately less surplus value too. 

“The actual product, however, like the surplus-value, depends on the number of workers employed by the capital, when the productivity is given. This is overlooked by Ricardo. He also ignores the manner in which the rent is formed: not only by transforming surplus-value into rent, but also capital into surplus-value. Of course this is only an apparent transformation of capital into surplus-value. Each particle of surplus-produce would represent surplus-value or surplus-labour, if the market-value were determined by the value of the product of III etc. Ricardo, moreover, only considers that in order to produce the same volume of product, more labour has to be employed, but disregards the fact that with the same capital, an ever diminishing quantity of living labour is employed, of which an ever greater part is necessary labour and an ever smaller part surplus-labour, and this is the decisive factor for the determination of both the rate of profit and the quantity of product produced.” (p 458) 

Even assuming that there is only differential rent, therefore, Marx concludes, Ricardo has gone no further forwards in explaining rent than his predecessors. 

“His important achievement in this field is, as De Quincey pointed out, the scientific formulation of the question. In solving it Ricardo accepts the traditional views. 

Namely : 

“The innovation that Ricardo introduced into the theory of rent, is that he resolves it into the question whether it really invalidates the law of value.” (Thomas de Quincey, The Logic of Political Economy, Edinburgh and London, 1844, p. 158.) 

On page 163 of the same work, De Quincey says further: 

“Rent is […] that portion of the produce from the soil (or from any agency of production) which is paid to the landlord for the use of its differential powers, as measured by comparison with those of similar agencies operating on the same market.” 

Furthermore on page 176: 

The objections against Ricardo are that the owners of No, 1 will not give it away for nothing. But in the period (this mythical period), when only No, 1 is being cultivated “no separate class of occupants and tenants distinct from the class of owners can have been formed”. 

So according to De Quincey this law of landownership [is valid] so long as there is no landownership in the modern sense of the word.” (p 459) 

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Forward To Part 27

Theories of Surplus Value, Part II, Chapter 16 - Part 25

If production has to move to less fertile soil, so as to produce the additional supplies needed, so that the market value rises, this leads to rising differential rent, because the more fertile soils produce additional surplus profits. However, to the extent that these higher prices also cause wages to rise, and the cost of constant capital to rise, a given amount of capital, say £100, will also, thereby, set in motion less constant and less variable capital, even on the more fertile soil, so that output on these lands must then also correspondingly fall. 

“Ricardo has no inkling of this. The rate of profit decreases, because the same capital, say £100, sets in motion less labour and pays more for this labour, thus yielding an ever smaller surplus. The actual product, however, like the surplus-value, depends on the number of workers employed by the capital, when the productivity is given. This is overlooked by Ricardo.” (p 458) 

This is hidden so long as profit exists. If capitals continue to produce profits, if the cost of constant capital rises, or the cost of variable-capital rises, firms do not generally reduce the amount of constant capital and variable capital they reproduce, because to do so would be to reduce also the mass of surplus value/profit they produce even more. Moreover, technical requirements might make it impossible to do so. It is only when the profit disappears altogether, so that capital cannot be physically reproduced, at these higher costs, that the capital itself is reduced, and reproduction cannot continue on the same scale. 

The rate of profit here falls for two reasons. Firstly, as the cost of the corn rises, this increases also the value of it as seed (constant capital). Even though this value is reproduced in the value of the end product, the ratio of surplus value to laid-out capital falls. So:- 

£10 seed + £25 wages + £25 profit = £60, r` = 25/35 = 5/7 = 71.43%. 

Assume the unit price of seed rises by 50%, but for now ignore the effect on wages. 

£15 seed + £25 wages + £25 profit = £65, r` = 25/40 = 5/8 = 62.5%. 

The rise in the price of seed has been passed on, in the value of the corn, but the rate of profit falls, because s remains constant, whilst c + v has risen from £35 to £40. (Note the total value of output does not rise by 50% from £60 to £90, because although the unit price of corn rises, the total output of corn falls, because of the same fall in productivity). In other words, if initially, £60 of output value represented 6,000 units of output, with a unit value of £0.01, the fall in productivity which causes the unit price to rise by 50% to £0.015, is the same fall in productivity, which results in a given amount of labour-time now producing much less output, so that output falls from 6,000 units to 4333 units. The rise in the price of the seed, as constant capital, is precisely a reflection of the fact that it now constitutes a larger proportion of output, and of current social labour-time. 

But, the rate of profit falls for a second reason. If the price of corn rises by 50%, the value of labour-power rises. Wages rise, and surplus value falls, because the amount of new value produced remains the same – but is now embodied in a smaller quantity of output, causing unit values to rise. So:- 

c £15 + v £37.50 + s £12.50 = £65, r` = 12.50/52.50 = 23.81%. 

Again, the higher value of variable-capital here is a reflection that the fall in productivity, which is represented on the one hand, by the drop in the volume of output, and on the other by the rise in unit values, means that the variable-capital now constitutes a larger proportion of the total output, and of current social labour-time, so that the amount left over as surplus social labour-time/surplus value, is correspondingly reduced. 

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Forward To Part 26

Paul Mason's Postcapitalism - A Detailed Critique - Chapter 1 (5)

CHAPTER 1 – NEOLIBERALISM IS BROKEN

Fiat Money 

Paul describes the basis of fiat money being trust. He is quite right that both left and right wing economists who see the cause of crisis being fiat money, and abandonment of the gold standard, are wide of the mark. I'm not sure that Paul himself has properly grasped what money is, and as I haven't read the work of David Graeber he refers to, I can't comment on the claims that there is no evidence that early human societies used barter, or that money emerged from it. What I would say is that, even if the latter claim is true, it is irrelevant. Even if early human societies did organise trade between themselves on the basis of trust, i.e. credit, rather than barter, in order to arrive at some definition of what the amount of value is that you are trusting the other party to provide you with, at some point in the future, you must first have a means of objectively determining that value. That basis is labour-time, for which there is lots of evidence, throughout history, in cultures from across the globe. 

And, that is what money is; it is a claim to a quantity of labour-time. It doesn't matter whether this claim to labour-time is in the physical form of a money-commodity, such as gold, whose own value is equal to that amount of labour-time, or in the form of a money token, such as a coin, or a note, or a notched stick, or a mark in a ledger, provided each of these latter are accepted as guaranteeing that the claim to the labour-time is honoured. A fiat currency certainly enables the state to abuse this trust by debasing the currency, but that applies to every coin issued over millennia. And, when gold from South America flooded back into Spain, following the actions of the Conquistadores, it led to a rise in inflation. A similar thing happened in Britain in the 18th and 19th centuries, which also provided a basis for primary capital accumulation. 

The continual injection of liquidity from the late 1980's, in response to market corrections and crashes, certainly created the asset price bubbles that burst in 2008, though it was the rise in the rate of profit, and fall in interest rates it produced, that was the initial basis for the rise in asset prices. The existence of fiat currency made it possible for the Federal Reserve, and other central banks, to do that, to print money to stuff into the mouths of commercial banks, and to buy up bonds, so as to reflate their prices, but it did not require them to do so. They did it for a specific reason; to keep the paper wealth of the capitalist class inflated. That private capitalist wealth is now held almost exclusively in this form of fictitious capital, and landed property, rather than productive wealth. For the last thirty years, the capitalist state has protected that paper wealth, even where doing so required destroying real productive wealth. This situation, created over the last thirty years, is vital to understanding the history up to and after 2008, and the condition that the global economy now finds itself in. It gives the specific, concrete characteristics of this fifth long wave cycle, compared to the previous four. 

Paul sets out the view of the right-wing economists such as Detlev Schlicter, but I've described similar views expressed by Libertarians and Austrians, like Peter Schiff, as far back as the 2008 crisis itself. When the financial crash comes, I think that many of the things they forecast may come true. We have already seen the preview in Cyprus and Greece, and, across the EU, new regulations have been put in place to appropriate the deposits of savers above €100,000. I doubt that central banks will respond by printing even more money, because, contrary to Paul's argument, the problem really is, as seen in Weimar, Argentina, Zimbabwe and elsewhere that if you print too many notes, you get hyperinflation. Indeed, we already have had hyperinflation of share, bond and property markets, that has spread to other assets. Just look at the prices of works of art, wine, classic cars, vinyl records and so on, all of which have been inflated. 

When the crash comes, as I wrote recently, cash is king, because a given amount of money will buy much more of these assets. In the 1930's, even the most expensive mansions in New York sold for 10% of their previous price. That, of course, is provided your savings are not confiscated to cover the banks' debts. But, as these asset prices crash, the flow of currency out of these spheres will rapidly inflate consumer goods prices, especially as people do what they always do in such conditions, and begin to buy up, and hoard, as much of vital commodities as they can get their hands on. 

Financialisation 

Paul describes the process of decay of urban areas, since the 1980's. It is a picture those of us who remember the 1970's can relate to, whereby high streets that once sustained retail businesses, today sustain pawnshops, pay day lenders and so on. It goes along with the description earlier of stagnant wages and precarious employment, supplemented by easy, but very expensive credit. 

Paul defines financialisation as a process whereby companies turned away from banks and went straight to the money markets for finance; banks instead of seeing customers as savers saw them as borrowers from whom they could make profits; consumers took on increasing amounts of debt, via credit cards, mortgages, student loans, car loans, etc.; a whole series of financial derivatives stood behind all of these different forms of lending, each being packaged together, and with other speculators betting on whether any of them would default. 

Paul says, 

“A growing proportion of profit in the economy is now being made not by employing workers, or providing goods and services that they buy with their wages, but by lending to them.” (p 16-17) 

This is wrong. When a worker borrows money, say to buy a TV, what the lender obtains, on the loan, is interest, not profit. Interest is a deduction from profit. Either the capitalist who produces the TV must sell it below its price of production, by an amount equal to the interest, and so getting less than the average profit, or else the worker must get wages to be able to pay the full price of the TV, plus the interest, in which case the worker's employer loses an amount of profit equal to the interest. 

Moreover, the money lender must either lend their own money-capital to the borrower, or else they must themselves borrow money-capital in the money market, so as to be able to lend it on. In that case, the “profit” they make will be equal to the difference between what it costs them to borrow, and what they can obtain from lending. They will also have to cover the costs of their buildings, equipment and wages. In effect, here, they act in the same way as a money-dealing or merchant capitalist, acting as an intermediary between lenders and borrowers, in the same way that a merchant acts as intermediary between producers and consumers. But, as Marx describes in Capital III, in relation to such merchant capitals, and the average rate of profit, if the rate of profit in such a sphere rose above the average, capital from other spheres would move into it, thereby reducing the rate of profit, as a result of competition between capitals, whilst raising the rate of profit in those spheres from where the capital had migrated. 

Of course, as happened with the landed aristocracy, there is another alternative that can apply for a limited time. The landed aristocracy borrowed against the value of its estates, but the inevitable consequence of that was that it gradually had to sell those estates, so as to repay its debts. For a time they could delude themselves that they could sustain themselves on the basis of inflated land prices, but each time they sold land, they destroyed their own capital base, and source of revenue. A similar thing has happened with pensions funds that relied on capital gains rather than revenue to cover pension liabilities. Similarly, workers who had accumulated actual wealth in the post-war period, in the form of houses, were encouraged to borrow against that wealth, with equity release scams, and so on, including to provide money to lend to their children for deposits on grossly overpriced houses, so as to artificially maintain demand for those houses, and keep the property bubble inflated. 

Alternatively, wages can be pushed below the value of labour-power, or for a time workers may work additional hours, but that ultimately snaps back. Debt can be continually rolled over, but eventually even the minimum payment can't be made, and the debts default. Ironically, a rise in official interest rates can have less effect here, because if you are already paying interest rates of 30% on credit card debt, let alone 4000% on payday loan debt, a quarter point rise by the Bank of England is neither here nor there. It's in the capitalised prices of bonds, shares, and property that these rises in rates have most effect. 

Paul points out that US production workers wages have stagnated since 1973, whilst debt in the economy has doubled to 300% of GDP. 

Paul also argues that this process led to a change between companies and banks. I think that's a stretch. Existing relations between companies and shareholders were enough to make executives have to focus on the quarterly figures, and those executives were always there to represent shareholders interest, irrespective of whether they obtained a proportion of funding via bank loans. The real change here was that the large corporations could sell shares or bonds at high prices so that the cost of funding for them dropped significantly. But, smaller businesses have increasingly found they cannot get bank loans, and where they have, recent revelations have shown how the banks often used the situation to expropriate their assets. 

As state and central bank policies inflated asset prices, and fuelled a property bubble, the banks devoted nearly all of the cheap cash that came their way into property speculation of one kind or another. Only around 4% of UK bank lending went to finance business expansion. 

Paul is right when he says, 

“The problems described here can be solved only if we stop financialisation.” (p 19) 

A progressive social-democratic government would restore credit controls, and raise official interest rates. Workers need higher wages not higher debts, and higher wages will encourage innovation to raise productivity. 

In the next part, I will examine what Paul says about Global Imbalances and Information Technology.

Back To Part 4

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