Monday, 21 April 2014

Marx and Engels' Theories of Crisis - Part 88

Crises Analysis– 1847, 1857, 2008, 20?? (8)

c) 2008 - continued

The expansion of debt, described in Part 87, had two aspects. Firstly, as the fall in global commodity values proceeded, the expansion of credit led to a fall in the value of money tokens, which prevented the fall in values being manifest as a global deflation of commodity prices. But, this same process, led to an unprecedented inflation of financial asset prices. Between 1982 and 2000, the Dow Jones Index rose from 1,000 to 10,000, a percentage rise way in excess of the growth of the US economy during that period. Similar rises took place in other stock markets, and bond markets. In addition, property markets, in several countries, experienced the same kind of bubbles. The bubbles in these asset markets were, in turn, the unsafe collateral on which individuals were encouraged to take on even more unsustainable levels of debt. 

Secondly, these growing levels of debt were the means by which the increasing gap between the exports of the US and UK to Asia, and their imports from Asia, was bridged. China and other Asian economies produced masses of cheap commodities, a large proportion of which were sold to the US and UK. These commodities contained large large amounts of produced surplus value, but to realise it, US and UK consumers had to buy those commodities, despite stagnant or falling real wages. They did so by taking on ever larger levels of debt, collateralised on increasingly outrageous valuations of their houses, shares and bonds.

The credit was provided in large part by those same Chinese and Asian producers, who recirculated the dollars they received into the purchase of US and UK bonds. In doing so, they ensured that they could continue to sell their commodities into these economies. This situation described in Part 74 is similar to that described by Marx in Capital III in relation to that in the 19th Century, concerning China and India, except the situation is reversed. Then, Mill and Ricardo etc. argued that Britain was not overproducing, but China and India were under-consuming. So, Britain forced its loans on China so that it could continue to consume British exports. Today, no one is forcing Britain or the US to borrow from China, but the end result is the same. Chinese over production is allowed to continue for so long as the loans keep flowing to finance the consumption. At some point, when the flow of profits declines, so that the supply of money-capital declines relative to its demand, then global interest rates will rise. 

When interest rates rise, borrowers default. When borrowers default, lenders also go bust and become loathe to lend. But, those who have borrowed to consume can no longer continue to do so. The producers of the commodities they bought from now find their market has dried up, and their overproduction becomes manifest. Nor can Central Banks remedy this situation of insolvency by printing money. Marx says,

“Ignorant and mistaken bank legislation, such as that of 1844-45, can intensify this money crisis. But no kind of bank legislation can eliminate a crisis.”

In a system based on credit, a crisis must occur when its not available. Bills represent sales, and purchases,

“whose extension far beyond the needs of society is, after all, the basis of the whole crisis.” 

In a message to today's politicians and central bankers, he continues,

“The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.”

“Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production.”

Once the mass of potential money-capital begins to fall relative to its demand, the consequent rise in interest rates cannot be reversed by increased money printing, because under these conditions, the devaluation of the currency simply results in inflation. Suppliers of money-capital then demand even higher rates of interest to compensate. But, this is to get ahead of ourselves.

Sunday, 20 April 2014

Marx and Engels' Theories of Crisis - Part 87

Crises Analysis– 1847, 1857, 2008, 20?? (7)

c) 2008

The background to the financial crisis of 2008 has been described earlier, in examining the post-war slump that ran from around 1974 to 1999. As was seen, that period of crisis and stagnation was fully explicable in terms of Marx and Engels' theories of crisis.

The period of post-war boom led to the frequent kind of cyclical crisis, in which capital is over produced, as a result of exuberance, based on high rates of profit and strong demand. The development of new technologies led to the creation of a series of new industries, into which capital could flow. As each crisis was resolved, the boom continued and the accumulation of capital went on apace.

“On the other hand, new lines of production are opened up, especially for the production of luxuries, and it is these that take as their basis this relative over-population, often set free in other lines of production through the increase of their constant capital. These new lines start out predominantly with living labour, and by degrees pass through the same evolution as the other lines of production. In either case the variable capital makes up a considerable portion of the total capital and wages are below the average, so that both the rate and mass of surplus-value in these lines of production are unusually high.” (Capital III, Chapter 14)

But, this period gave way to a period of stagnation in the 1980's and 90's. During this period, the potential for establishing new, high-value/high profit industries is limited. This limits, therefore, the potential for capital accumulation, which is the basis of the stagnation. This is more pronounced in developed economies such as the US and UK, because industrial capital, in search of higher rates of profit, in existing industries, begins to relocate to a number of low wage economies, in Asia, where a combination of high levels of productivity, resulting from the capital intensive nature of production, with low wages, results in a high rate of surplus value, and higher rate of profit than possible in developed economies.

This results in a rapid industrialisation of a number of these Asian Tigers, and in particular, China, alongside the de-industrialisation of the economy in the US and UK. In these two economies, in particular, political decisions of their conservative governments, tied historically, sociologically and electorally to the petit-bourgeoisie, the small capitalists, and to the landed and financial oligarchy, encourage this process.

This is the situation Marx describes in Capital III, Chapter 20, where he sets out the way that the predominance of Merchant Capital (in which he includes money-dealing capital) always leads to such backwardness, compared to where industrial capital predominates.

“On the contrary, wherever merchant's capital still predominates we find backward conditions. This is true even within one and the same country, in which, for instance, the specifically merchant towns present far more striking analogies with past conditions than industrial towns.”

Capital III, Chapter 20

It connects up, Marx says with those other throwbacks, the landed and financial oligarchy. The centre for such interests is London, and it is in London, and its environs that the support for these reactionary policies pursued by the Tories is greatest, whereas in the rest of the country support for the Tories is much lower.

Instead of a social-democratic strategy, such as that followed in Germany, of seeking to move industrial capital away from these old, low-profit industries into newer high value/high profit industries, capable of sustaining higher wages on the basis of high levels of productivity, and the use of complex labour, these governments instead fell back on to a 19th century strategy of trying to extract absolute surplus value, on the basis of low wages, that could now be imposed after costly battles had led to the defeat of the workers, and the weakening of their organisations. But, for all the reasons Marx and Engels described, in relation to the limitations of extracting absolute surplus value, this strategy was never likely to be successful in the longer-term.

As described in those sections, one consequence of this, and the solutions adopted, in these economies, was that large amounts of money tokens, and credit-money was produced. In the global economy, the shift of production to Asia had caused the value of many commodities to fall drastically. This was intensified in the 1990's, as new technologies began to be introduced, which raised productivity, and also significantly reduced the turnover time of capital. Both brought a sharp rise in the rate and mass of profit. In so far as capital flowed into some of these new technology industries in the developed economies, particularly in the US, their own high value/high profit production led to rapid growth for a number of companies.

The growth in the mass and rate of profit from the late 1980's onwards was so huge, however, that even after creating whole new economies in Asia etc., and whole new industries in the area of technology, the supply of money-capital exceeded its demand for conversion into productive-capital. It pressed down, therefore, on global money markets, on interest rates, in the way Marx describes. global interest rates fell almost continuously from 1982 until 2012, at first because the demand for capital was low, and then because its supply was high.

This combination of low interest rates, caused by a rising mass of profit, and a devaluation of currencies resulting from the expansion of credit, was the basis for expanding aggregate demand in the UK and US as real wages stagnated or fell. A central plank was the deregulation of financial markets in the late 1980's, introduced by Thatcher and Reagan, that encouraged more and more people to go into debt, and removed all controls from the banks and finance houses that lent to them and who then gambled, via a series of derivatives, over how many of these debts would actually go bad.

Saturday, 19 April 2014

May's Elections Will Be The High Point Of The European Right

In the upcoming elections, to the European Parliament, in May, the Right and Far Right will do very well. In Britain, UKIP are likely to come second to Labour, beating even an increasingly conservative and euroseptic Tory Party into third place. The Liberals, particularly after Clegg's abysmal performance against Farage, are likely to be annihilated. It could even spell an early bath for Clegg if not for the Coalition.

In France, the Front National may even top the poll. It has sought to shed its neo-fascist image, to present itself as merely an extreme nationalist party, similar to UKIP. Yet, the history of many of the members of both parties – the BNP has openly admitted encouraging its members to join UKIP – and the underlying racism of both parties, remains.

Similar Far Right parties in the Netherlands, in Austria, Finland and elsewhere look set to benefit from the nationalist bandwagon that short-sighted policies of austerity have generated across Europe. As living standards have dropped, and services been cut, as a result of those policies, the usual scapegoat of foreigners – be it EU bureaucrats, or immigrants – has formed an easy target, facilitating the message of the Far Right.

But, in many ways, all this gives a false picture. The main reason these Far Right parties will do well is that the turnout, in the EU elections, will be low. It is the same reason UKIP, and even the BNP, did well in the last Euro elections. Its why they tend to do well in local elections, where the turnout is usually less than 30%.

Even where UKIP have done relatively well in by-elections, their actual share of the vote, for a normal General Election, has not been that significant. They have done well, in Labour constituencies, only to the extent that the Tories have done appallingly. Compared to the Labour vote, they have continued to lag well behind.

No one seriously believes that in a General Election, Farage and his circus of “loonies, fruitcakes and closet racists” will even win one seat let alone pose any significant chance of winning. The most likely effect will be to take sufficient votes from the Tories to let Labour win. Look at the experience of the BNP. It held many council seats, won in small turnout elections, in the same way it won its Euro seats. Today, it's a busted flush. In the General Election, it went backwards; it lost most of the council seats it had; it's bankrupt politically and financially.

Even the most successful of the Far Right parties, the FN in France, has no chance of winning the Presidency or a majority in the National Assembly. It benefits from the semi-proportional representation system in France, as did the BNP and UKIP in the last Euro elections. But, the success of the Far Right in the euro elections is likely to be part of their undoing. When Jean Marie Le Pen managed to get into the final round of Presidential elections, several years ago, the response of the establishment was to muster against him, in favour of Chirac.

The same could be seen in relation to the BNP, at its height, and to an extent today with Farage – though in part he has been a media created figure in his own right. Capital, particularly big capital, has no need of these Far Right, and certainly not fascist or neo-fascist parties, at the moment. In fact, after their experiences with Hitler in the 1930's, they are likely to have a high watermark before they resort to such measures again.

The Far Right represent a destabilising force that capital does not need when it is secure in its position, entrenched within resilient bourgeois social-democratic regimes. Although the success of UKIP is likely to exert a further centrifugal force on the Tory Party – sending its conservative wing off in the direction of Farage, and its social-democratic wing off towards what is left of the Liberals and towards Labour – the main result will be a further coming together of the interests of big capital, under the aegis of social democracy.

Whether that social democracy has the party label Labour or Tory, SDP or CDU etc. does not matter.

The other reason that May will mark the high water mark for the Far Right is the economic conjuncture. The long wave cycle turned from its Spring phase to its Summer phase around 2012/13. That means that strong global growth continues until around 2025-30, just as it did between 1999-2008, and indeed as it has done, in most of the world, outside Europe and North America, since 2009. But, the conditions under which that growth occurs have changed, and will continue to change. Firstly, the high prices of raw materials that characterised the earlier period, stop rising and begin to fall as large, new sources of supply come on stream. Secondly, the large gains in productivity that reduced the values of commodities and pushed up profits, slow down. Thirdly, the large increases in the supply of labour-power (both new workers and relative surplus population due to productivity growth) slows significantly.

China is already experiencing that and seeking sources of cheap labour in Vietnam, Indonesia, Africa etc. Even Britain is experiencing shortages for some skilled workers, exacerbated by the immigration cap. In the US, it was revealed that the top technology companies have formed a secret cartel so that none of them poach highly paid workers from the others, which would push up wages even further.

The consequence is that countries producing manufactured goods and services find it harder to sell to primary producing economies as the latter see their income fall, as raw material prices fall. Secondly, the latter see their currencies fall as their income falls. This pushes up domestic inflation. Workers seek higher wages, so profits fall. The rash of strikes across South Africa's mining sector is an indication of this process. But, this comes at a time when other emerging markets are seeing their currencies fall and inflation rates climb, in the backwash of the tapering of QE in the US. The result is sharply higher interest rates in these economies to defend the currency and curtail inflation. But, this process plays into and is part of a general rise in interest rates across the global economy.

Thirdly, the slow down in productivity growth means that the fall in commodity values slows down or stops. That is exacerbated by the fact that the world's main manufacturing power – China – has faced rising costs and a rising currency value, which makes the commodities it supplies to the world's consumers increasingly expensive.

In the last thirty years, a massive expansion in the quantity of money tokens and credit-money, pumped into circulation, did not cause consumer price inflation only because the value of those consumer goods was itself being massively reduced. In a world of slowing productivity growth, and rising commodity values, the massive amount of liquidity already in circulation, will inevitably result in sharply rising inflation.

The latest US data already suggest inflation is rising, and the only reason inflation in the UK and EU has fallen (besides the fact the figures are bogus because they do not include rising housing and pension costs) is because the value of the pound and euro have risen against the dollar, reducing import costs.

As interest rates rise across the globe, the money that flowed into Europe and the US, will flow out again, causing their exchange rates to fall, inflation rates to rise, and prompting another rise in interest rates, as bond investors seek to defend their assets against depreciation.

The consequence of this is a weakening of the economic conditions which have strengthened the positions of those sections of capital on which conservative and nationalist parties rely. Low interest rates are the condition for the growth of the “plethora of small capital”, as Marx describes it. It is seen in the 150,000 businesses in Britain described as “zombie firms”, who just about survive being able to repay this low rate of interest, but unable even to produce enough profit to repay the capital sum they have borrowed.

These zombie firms cling to existence on the back of these low interest rates, and on the back of the extraction of absolute surplus value from their low paid workers, who make up many of those on zero hours contracts. Many survive only because the low wages they pay are subsidised, by the state, by a transfer of tax, taken from the wages of other workers, and from the fact that their workers, even then, have to resort to Pay Day lenders, to make ends meet.

These small capitalists are the bedrock of the Tory Party, and what they represent makes up the bulk of votes for the Tories. UKIP simply represents the more extreme, more consistent exposition of those ideas. But, the Tories also draw support from other traditional sources, from the financial and landed oligarchy, and commercial capital. As Marx points out, wherever these interests predominate, the political regime is more reactionary than where industrial capital predominates. The centre for these interests in Britain, is London and its environs, and its there that the Tories have most of their support.

But, the consequence of the change in the conjuncture is that as well as interest rates rising for the reasons outlined, the rate of profit begins to fall, as all those causes of it previously rising go into reverse. A fall in the rate of profit first hits all of that plethora of small capital. The initial effect is likely to be a sharp rise in unemployment, as the zombie firms go bust. The large scale disguised unemployment of millions employed part-time, on temporary contracts, under employed, and on zero hours contracts will then be exposed, along with all of those who are supposedly self-employed, but who are simply scraping a living from underemployment on their own account.

But, ironically, big capital may benefit from this process. Part of the drag on its costs, represented by the taxes on its workers, to subsidise low paying small capitalists, will be lifted. To the extent it picks up capital on the cheap, its rate of profit will rise. More workers will be picked up by this big capital, paid higher wages, and may for the first time become organised in unions. But, in any case, the fall in the rate of profit, at a time when more productive capital will need to be employed as productivity growth falls, and in order to retain markets, means that interest rates will rise, as the supply of money-capital falls relative to its demand. The likely consequence will be in the short term a more serious financial collapse even than that of 2008/9.

It will fatally weaken the power of the financial and landed oligarchy and the merchant capitalists, as workers end their obsession with debt fuelled consumption and property speculation. It will by contrast strengthen big industrial capital and encourage its logical drive to establish a European state. To the extent it does that by mobilising social-democratic forces to achieve it, the power of conservative and nationalistic ideas will be further weakened.

In the second half of 2014, a new 3 year cycle will lead to a slow down in growth that will last until around mid 2015. Survey data is already indicating the onset of that cycle.  In countries like the UK, where austerity has been inflicted, it will give the lie to the idea that those policies have been beneficial. In Britain, where much of the recovery has been built on an encouragement of further debt, and the same kind of state intervention in the property market that led to the US sub-prime crisis, that is likely to be even more acute, particularly considering the huge number of people who now rely on Pay Day lenders, and food banks.

Despite the government throwing everything it could at it, outside London and a few other cities, the property market barely flickered. How could it do any more when in most of Britain around half the working age population now use Pay Day loans, and about a quarter of the population have used food banks.  The Liberal-Tory claims that we are all in this together, suggested again recently by Employment Minister Esther McVey, who said,

"It’s been a tough time for you, for me and everybody in the UK but we’ve now turned that round.” (Paul Mason's Blog)

shows just how remote they are from the real world.

A slow down in the economy, rising unemployment, rising interest rates, and increasing debt defaults will kill the property market. All suggestions that “this time its different” will be shown to be as false as when the same statements preceded the 75% drop in the NASDAQ in 2000!

The denouement in all this financial froth will be the death knell for those conservative and nationalist political forces that rose on the back of it. We should say good riddance to both.

Northern Soul Classics - The Fife Piper - The Dynatones

Classic Wheel Instrumental.

Friday, 18 April 2014

Marx and Engels' Theories of Crisis - Part 86

Crises Analysis– 1847, 1857, 2008, 20?? (6)

b) 1857 - continued

Marx explains the evolution of the crisis of 1857, and its relation to the cycle of stagnation, prosperity, boom, and crisis, and how this impacts the rate of profit and of interest, in similar terms to those I have set out elsewhere in relation to the Long Wave. Marx writes,

“After the reproduction process has again reached that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended; this forms, indeed, the "sound" basis again for a ready flow of returns and extended production. In this state the rate of interest is still low, although it rises above its minimum. This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. On the other hand, those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers. To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level. It reaches its maximum again as soon as the new crisis sets in. Credit suddenly stops then, payments are suspended, the reproduction process is paralysed, and with the previously mentioned exceptions, a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital.”

In fact, at the moment before such crises erupt everything appears to be going well, because during such periods, asset and commodity prices are at their height, having been raised in the preceding period.

“Thus business always appears almost excessively sound right on the eve of a crash. The best proof of this is furnished, for instance, by the Reports on Bank Acts of 1857 and 1858, in which all bank directors, merchants, in short all the invited experts with Lord Overstone at their head, congratulated one another on the prosperity and soundness of business — just one month before the outbreak of the crisis in August 1857. And, strangely enough, Tooke in his History of Prices succumbs to this illusion once again as historian for each crisis. Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place.”


At this point, the demand for money as means of circulation and means of payment rises sharply. That very shortage causes the holders of money to hang on to it, increasing the shortage further, whilst sellers who have previously been happy to accept payment on credit, now demand hard cash, increasing the shortage further. Short run interest rates are driven sharply higher. There is a credit crunch. In 1847, and 1857, it was the limitations of the 1844 Bank Act, which exacerbated this shortage. Engels writes,

“By such artificial intensification of demand for money accommodation, that is, for means of payment at the decisive moment, and the simultaneous restriction of the supply the Bank Act drives the rate of interest to a hitherto unknown height during a crisis. Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis. In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time.”

Thursday, 17 April 2014

Capital II, Chapter 15 - Part 24

Second Case. A Change in the Price of Materials of Production, All Other Circumstances Remaining the Same.

Marx examines what happens if everything else is held constant, but the price of materials is halved.

Of the £900 advanced capital, 4/5 = £720, was previously spent on materials, and £180 on wages. If the price of materials falls by 50%, only £360 is required for 9 weeks, or £240 for the 6 week working period.

£180 is still required for wages, so the total capital advanced for 9 weeks, is £180 + £360 or £540. That means £360 of the original £900 capital is now released. If the business is not to be expanded, this released capital now becomes superfluous, and enters the money market, in search of some other venture to finance.

“If this fall in prices were not due to accidental circumstances (a particularly rich harvest, over-supply, etc.) but to an increase of productive power in the branch of production which furnishes the raw materials, then this money-capital would be an absolute addition to the money-market, and to the capital available in the form of money-capital in general, because it would no longer constitute an integral part of the capital already invested.” (p 295-6)

In other words, this money could only act as permanently released capital, if the fall in prices was itself permanent rather than a temporary fluctuation in market prices. If it were the latter, it would be likely to be cancelled out by a future variation in the opposite direction.

But, a fall in price caused by a fall in value is itself reflected in the fact that, as a consequence of the fall in the value of materials, goes a fall in the value of the end product. Less money-capital is advanced to purchase materials, and a smaller corresponding amount is returned from the sale of the end product. Less capital circulates in this sphere (£360) and is spun off to elsewhere. 

Third Case. A Change in the Market Price of the Product Itself.

It should be noted that this is a change in its market price not its value. A change in market price arises as a consequence of changes in its demand and supply. A change in its value arises from a change in the socially necessary labour time required for its production.

Suppose a commodity is produced by the average productivity, but, when it is brought to market, for some reason, for example a change of fashion, demand for it has fallen sharply. Supply exceeds demand and prices fall. Technically, too much labour-time has been spent on its production, but this may be merely a temporary situation. If the product is ice cream, and this week is cold, demand next week, when there is a heatwave, could more than compensate for this week's low demand.

Either way, the fact that the commodity has to be sold at a market price below its exchange value represents a capital loss for the seller. In order to continue production, on the same scale they will have to make it good with additional capital from their own pocket, or borrowing.

The loss to the seller may be a gain to the buyer. If the price of ice cream falls this week, because of bad weather, the producers and wholesalers may suffer a loss as prices fall. But, vendors who buy up these cheap supplies will benefit if they sell them next week during the height of a heat wave. That is a direct gain for the buyer. But, the buyer may gain, 

“Indirectly, if the change of prices is caused by a change of value reacting on the old product and if this product passes again, as an element of production, into another sphere of production and there releases capital pro tanto.” (p 296)

In this case, the producer of X has sent it to market having expended say £80 in materials and £20 in wages on its production. In the meantime, the value of the materials falls to £70, which can now only be recovered in its price. It falls to £90. If X is used in the production of Y, the producers of Y gain indirectly, because £10 of capital, they previously advanced, has now been released.

But, the producer of X does not really suffer a loss here. The £90 they receive for X is enough to buy the replacement labour-power, and the materials at its new price of £70. They can continue production on the same scale.  They may have suffered a paper capital loss, because the historic price paid for these materials was £80, and are now worth only £70, but not only is the £70 they now receive, as part of the price of their own commodity, sufficient to reproduce this capital, but because the capital they now have to advance for production has been reduced by £10, their rate of profit is correspondingly increased.  In short, any surplus value they produce would now buy a greater quantity of these materials than it did previously.

The same is true in reverse if prices rise. A rise in market price not related to a change in value, provides a capital gain to the seller, and capital loss to the buyer. But, a higher price could also be due to a change in its value resulting from productivity changes arising after it was sent to market. If its linen, for example, and the price of cotton rises by 50% (say a £10 rise) then the price of linen will rise by £10 also, even though this £10 was never advanced for its production.

The seller of the linen appears to make a £10 gain, but in reality, they need this extra £10 in order to replace the cotton consumed in production. The value of the linen is based not on the money-capital advanced for its purchase, its historic price, or the labour-time embodied in the productive capital it bought, but on the labour-time currently required to reproduce it. In fact, value is not intrinsic to a commodity; it is not somehow embodied, and fixed within it. The commodity is only a shell, which at any time acts as a receptacle within which a given portion of society's available social labour-time is kept. Because the latter is constantly changing, the value residing in each commodity is constantly changing too.

“As we have assumed that the prices of the elements of the product were given before it was brought to market as commodity-capital, a real change of value might have caused the rise of prices since it acted retroactively, causing a subsequent rise in the price of, say, raw materials. In that event capitalist X would realise a gain on his product circulating as commodity-capital and on his available productive supply. This gain would give him an additional capital, which would now be needed for the continuation of his business with the new and higher prices of the elements of production.” (p 296)

It can be seen, from these examples, why interest rates have fallen over the last 30 years. Not only have huge rises in productivity brought about a massive rise in the rate and volume of profit, but the same causes have also reduced the value of constant and variable capital, bringing about the kind of “freeing” of money-capital into the money market described by Marx above. In addition, those same increases in productivity have brought about a significant reduction in both the working period and circulation period of capital, throwing even greater amounts of “freed” money-capital into money markets, continually pushing down the global rate of interest.

Wednesday, 16 April 2014

Marx and Engels' Theories of Crisis - Part 85

Crises Analysis– 1847, 1857, 2008, 20?? (5)

b) 1857 

1857 came in the latter part of the Summer phase of the Long Wave. 1847 and 2008 are financial crises in the context of high and rising rates of profit creating an abundance of money-capital, causing low interest rates and speculation. 1857 is more like the 1929 Wall Street Crash, in the US. Both are instances of over-trading and speculation, made possible by an increase in credit. 1857 is mostly a financial crisis, similar to 1847, again resulting from the effects of the 1844 Bank Act, indicated by the fact that after the Act was suspended, the 1857 crisis was overcome, and the economy continued to grow until the late 1860's.

The 1857 crisis was itself also mostly a financial crisis that spills over into the real economy, but as Marx sets out, the basis of the financial crisis in 1857 was more closely tied to what was happening in the real economy than was the case in 1847. There were many aspects that were the same such as the low interest rates, and availability of money-capital encouraging speculation, and the fact that this was a period of boom, and high profits. Marx sets out,

“...the example of Ipswich, where in the course of a few years immediately preceding 1857 the deposits of the capitalist farmers quadrupled), what was formerly a private hoard or coin reserve is always converted into loanable capital for a definite time, does not indicate a growth in productive capital any more than the increasing deposits with the London stock banks when the latter began to pay interest on deposits. As long as the scale of production remains the same, this expansion leads only to an abundance of loanable money-capital as compared with the productive. Hence the low rate of interest.” (ibid)

Especially when interest rates are low, these small money-hoards are frequently mobilised into larger pools organised by the banks, and today by the insurance companies, mutual funds and so on, and used for the purpose of speculation in property, bonds, shares etc. solely on the basis of obtaining quick, sizeable capital gains, which causes asset price bubbles of the type we have seen, in all these areas, grow larger and larger for the last 30 years.

That is effectively what happened in 1857. A financial panic broke out in the US, whose economy had been growing rapidly in the preceding period, sucking in large amounts of imports from Europe, particularly Britain. Marx wrote a number of articles for the New York Daily Tribune at the time on the crisis. Marx, in this article, makes clear that the effects of the 1844 Bank Act had effects far wider than just in the UK, just as today the policy of QE has effects far wider than just in the US. Rather as happens today with China supplying credit, Britain supplied large amounts of credit to the US. US banks had already become more cautious in their lending earlier in 1857, as the end of the Crimean War had led to a restoration of agricultural production, which meant the need for US agricultural imports declined. When the panic erupted in the US, with the collapse of Ohio Life Insurance and Trust this quickly spread into the economy causing demand to fall, with a consequent effect on US imports from Europe. The US continued to send its shipments of cotton and other goods to Britain and Europe, but now, without revenue from exports to cover them, Britain had to pay with gold. Hence the “flow of gold from England to America”. But, the consequence is then that British exporters having lost markets have to cut production, lay off workers, and go bust. That means Britain in turn buys less imported cotton etc. from the US. As US exports then no longer cover its imports from Britain, it has to pay for them with gold, the flow goes back the other way from the US to Britain. Marx describes it as being like volley-firing.

“In 1857, the crisis broke out in the United States. A flow of gold from England to America followed. But as soon as the bubble in America burst, the crisis broke out in England and the gold flowed from America to England. The same took place between England and the continent. The balance of payments is in times of general crisis unfavourable to every nation, at least to every commercially developed nation, but always to each country in succession, as in volley firing, i.e., as soon as each one’s turn comes for making payments; and once the crisis has broken out, e.g., in England, it compresses the series of these terms into a very short period. It then becomes evident that all these nations have simultaneously over-exported (thus over-produced) and over-imported (thus over-traded), that prices were inflated in all of them, and credit stretched too far. And the same break-down takes place in all of them. The phenomenon of a gold drain then takes place successively in all of them and proves precisely by its general character 1) that gold drain is just a phenomenon of a crisis, not its cause; 2) that the sequence in which it hits the various countries indicates only when their judgement-day has come, i.e., when the crisis started and its latent elements come to the fore there.”