Tuesday, 13 October 2015

The VW/Saudi Proxy

Events over the last few weeks at VW, and in Saudi Arabia, illustrate points I have been making for the last couple of years in relation to the change in the long wave conjuncture, from the Spring to Summer phase.

At the end of last year, I set out the way that the collapse in oil prices had two obvious effects. Firstly, because oil is a significant element of constant capital, and thereby comprises a large part of the cost of production, any large fall in its price, would reduce that cost, and thereby result in a large rise in the rate of profit.  In the same way, because oil, and oil related products (everything from petrol and plastics to toothpaste) forms a huge element of consumption, the reduction in the value of oil, thereby reduces the price of wage goods, and so the value of labour-power.  The consequence of this is to increase the rate of surplus value, and thereby the rate of profit.

Firstly, therefore, the fall in oil prices, brings about a sharp rise in the mass and rate of profit, as well as a release of capital.  It thereby makes possible an increase in the accumulation of capital, particularly in all those spheres where oil comprises a large element of the cost of production, as well as in those spheres producing wage goods, which are likely to see some rise in demand as a result of a rise in workers real wages.  Although, this will be offset by a fall in investment spending in the oil industry, and associated production, this can only ever be small in relation to the beneficial effect on all other capital.

Despite the fact that the global economy has been subdued as the result of being in a downward phase of the three year cycle from Q3 2014, to Q3 2015, and despite the fact that the effect on investment in the oil and related industries is fairly immediate (although despite rapidly falling prices, oil output has continued to rise, which signifies that a further sharp fall is required before the unprofitable producers are finally shaken out, and a new process of concentration and centralisation occurs) whilst the effect of capital release, and rising rates of profit in other areas, and increases in consumption, take some time to feed through, some sign of that has been seen in the US, where new car sales have risen sharply.

One reason that consumption takes time to rise, is that the savings that workers enjoy from lower prices of petrol, and other oil derived products, come to them only piecemeal.  As a worker, you might enjoy around a $2,000 a year windfall, as a result of lower oil prices, but it only comes to you as $40 a week.  But, for an oil producer, the fall in revenue will be pretty noticeable straight away. Consumers might save up some of their savings, before splashing out on a new car, or larger purchase.  In addition, consumers across the globe are weighed down by huge, unprecedented levels of private debt, run up since the 1980's.  An immediate effect of any savings for consumers, may well be to pay down some of this private debt, rather than to immediately use the savings for additional consumption.

In short, however, the overall economic effect of this fall in the oil price is beneficial.  Even paying down the private debt, simply means that consumers will have a larger part of their incomes available in future to cover purchases, rather that to cover debt and interest.

By contrast, the consequence of falling oil prices, and the same is true for the falls seen in recent years, in the prices of copper, and other materials, has a depressing effect on financial markets.  As Marx sets out.  The rate of interest is the result of a struggle between two camps of capital, on the one hand productive-capital, which needs to borrow money-capital to cover the purchase of means of production and labour-power, and money-lending capital, which centralises the ownership of that money-capital in the banks and stock exchanges.

The available supply of this money-capital depends upon the stock of it already in existence - which is why Marx and Engels set out that older more mature societies tend to have more of it, and so lower interest rates, and because many of the former productive-capitalists retire from activity to live off the lending of their money-capital - and the flow of additional potential money-capital that results from the receipt of revenues by exploiters - profits, interest and rent.

The demand for this money-capital, depends upon the extent to which productive-capital needs it to expand.  On the one hand, a rise in the rate of profit, might encourage firms to want to expand, and thereby borrow more money to do so.  On the other hand, a consequent rise in the mass of profit, which this brings about may mean the firm has more internal resources from that profit to use for expansion, without the need to go to the money market for additional funds.  The struggles between these two camps of capital, demand on the one side, supply on the other, determines the rate of interest.

High oil and other primary product prices, created surplus profits, which took the form of rents for the producers of these products.  A characteristic feature of revenues, is that they are used for consumption rather than production.  But, what is not actually consumed in the form of commodities, can be consumed in the form of speculation, the purchase of fictitious capital - shares, bonds, property.  In other words, all of these revenues poured into global financial markets - the so called Petro-Dollar Market is a visible expression of that - as a supply of loanable money-capital.  It thereby acted to push down global interest rates.  The large rise in global rates of profit since the late 1980's had also had the same effect in reducing global interest rates over that period.

One expression of this, was the massive flow of these money funds into global stock and bond markets, also facilitated by the so called Big Bang, undertaken by Thatcher in the late 1980's in Britain, and by Reagan in the US at around the same time.  Low interest rates were the other side of the coin to these astronomical prices for fictitious capital, as ever larger bubbles in stock, bond and property have been blown up.

But, in recent weeks, Saudi Arabia, which was the source of vast amounts of these petro-dollars into global money markets, has stopped being a lender on a vast scale, and become a borrower.  Although, Saudi Arabia, produces oil at a cost of around $5 per barrel, and makes profits at any price above that - which is one reason it has recently offered to sell oil to Asian markets at a discounted price, even lower than current market prices, so as to increase its market share - it needs oil at around $100 a barrel, in order to provide the mass of revenues required to cover its large level of state spending.

That state spending has increased recently with the proxy war it is conducting against Iran in Yemen, and in Syria and Iraq, where it along with other feudal gulf states finances, trains, and equips the jihadists of ISIS, and other clerical-fascists.  Saudi Arabia, also requires high levels of state spending to provide for its own population, as a means of pacifying them, in the absence of any real growth of industry in the economy, and an abysmal record on human rights, and lack of even bourgeois democratic freedoms.

In recent weeks, therefore, rather than pumping money into the money markets to buy bonds, Saudia Arabia has been selling some of the US and other bonds, it owns to raise cash, and also issuing its own bonds to the same end.  It has not been alone.  All of the other gulf states as well as countries like Norway, have been following a similar course.  In other words, the situation is reversing, so that after 30 years, of falling interest rates, and soaring prices of fictitious capital, we now have interest rates rising.

The example, of Volkswagen demonstrates this process from a different angle.  One consequence of these soaring prices for fictitious capital, is that it creates a vicious circle.  The more the prices of bonds, shares, property rise, the more they are demanded, because speculation offers the lure of much higher prices for any of these assets in the near future.  Buyers of these over-priced assets become disinterested in the fact that they provide them with very little income, and a sharply falling yield, because they are more concerned with making these rapid, large capital gains.  That would normally stop, when those bubbles burst, and the speculators lost their shirts from the gamble.  Ultimately, that must happen, but for the last thirty years, every time such a bubble has burst, or started to burst, central banks have intervened to print money tokens, and use them to reflate those asset prices, so that the belief takes hold that these markets can only ever go up.

The consequence of this is that there is no reason for the owners of this potential money-capital to loan it for productive purposes, which take long periods to produce profits, in uncertain conditions. The owners of money-capital would much larger lend money to people to buy over priced houses, in the belief that those over priced houses will always become even more over priced, because should they start to fall, the central bank will make even more money available, whilst the government will find ways of giving that money away, so as to inflate house prices even further.  The owners of potential money-capital would rather use it to buy existing bonds, or shares for the same reason.

Because none of this lending leads to any productive-activity - lending money for someone to buy an existing house is not the same as lending money to a builder to build a house, just as buying existing bonds and shares does nothing to buy another factory, machine, or to employ a single additional worker - the lending only pushes more liquidity into a demand for bonds, shares, property and so pushes up the prices of all these things, becoming a self-fulfilling prophecy.  It is why the policy of Q.E. has done nothing to stimulate economic activity, but has simply created asset price bubbles, whilst actually if anything causing a deflation of consumer prices, and increase in consumer debt.

But, for precisely that reason, it creates an incentive as Andy Haldane wrote recently for capital to eat itself.  As money-capital goes into speculation rather than productive investment, the potential for the mass of profits to grow is necessarily restricted.  As the mass of profits is restricted, the potential to pay dividends as interest on the loaned money-capital, is reduced.  The consequence is that as the amount of dividend remains the same, but the price of shares rises, the yield - the relation of the dividend to the share price - declines.  In order to sustain yields, a bigger portion of the profit must be devoted to paying out dividends, and a smaller part retained by companies for expansion.  So, companies grow more slowly than they would have done, which means their profits grow more slowly than they would have done, which means their ability to pay dividends declines, and so the vicious circle intensifies.

This is made worse, as haldane makes clear by existing corporate governance regulations.  As Marx, made clear in Capital Volume III,  shareholders are not the owners of joint stock companies.  Such companies represent socialised capital.  That is the company's productive-capital is owned collectively by the company itself as a legal corporate body.  The shareholders are merely lenders of money-capital to the company, in return for which they are sold shares by the company.  The shareholders, are only what the name suggests, the owners of shares, not the company's capital.  They are creditors of the company, not its owners, no different in that sense to a bank that makes a loan to the company, or a buyer of the company's bonds.  As such, the ownership of shares in economic terms, gives the owner of the share only a right to receive an average rate of interest on the money they have loaned.

As I've pointed out before, this is made clear in English Law, which distinguishes clearly between the ownership of shares, and the ownership of the firm's productive-capital.

"A company is an entity distinct alike from its shareholders and its directors.” (Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 by Greer LJ. 

 Its also an issue discussed recently in Moneyweek.

The nature of a joint stock company as such socialised capital is shown by the fact that a company could become its own only shareholder, simply by buying back all of the outstanding shares from its own profits.  As Haldane and Clinton have suggested, from a purely bourgeois social-democratic viewpoint, this indicates the need for a thorough reform of corporate governance rules, to prevent shareholders having their current disproportionate influence on company decision making.  Such decisions, should be the preserve of the associated producers - the workers and managers - within the company - not of shareholders and other such creditors.

In fact, with interest rates being so low, large companies, in particular, have been doing this.  They have issued bonds, or used their own profits to buy back shares, rather than use the proceeds to invest in additional productive-capital.  They have not been buying back shares to rid themselves of shareholders, however.  On the contrary, they have been doing this, because by doing so they thereby increase the price of the outstanding shares, inflating further the fictitious wealth of the shareholders, as well as the share options of the top executives who are the ones who make such decisions.  At the same time, the reduction in the number of outstanding shares, acts to inflate the earnings per share, and dividend yield on each remaining share, which thereby gives a wholly distorted picture of the extent to which stock markets are over valued.

This is where the events at VW come in as a proxy of the other side of the story.  As companies have used a disproportionate amount of their profits to hand back to shareholders in one form or another - a higher proportion as dividends, direct returns of money, the buyback of shares and so on - so a smaller proportion has gone into productive investment.  Yet, the laws of capitalist production, set objective limits upon how far that can continue.  In the end, each capital must compete for its right to exist in the marketplace, and in the end, its ability to do so depends upon undertaking actual investment in productive-capital, to be able to produce more efficiently, more cheaply, to produce new types of products able to claim a share of the market and so on.

In the US, both US and Japanese car producers have spent considerable sums investing in the production of both electric only and hybrid powered cars, as a means of complying with the more stringent emissions requirements.  In Europe, less stringent requirements, and a history, particularly in mainland Europe, of developing diesel engines, as a more efficient form of motive power, mitigated against that.  To have largely discounted all of the investment that had been put into the production of diesel powered cars, and to have had to catch up, by spending large amounts to invest in the productive-capital required to develop electric and hybrid powered cars, would have required a large investment of money-capital, and a large cut in the amount paid out to shareholders as dividends.  VW, and almost certainly most other European car manufacturers, decided instead to invest simply in technology that would enable their diesel engines to cheat on the emissions tests.

Thats is, in fact, symptomatic of the avoidance of necessary expenditures in a whole range of areas, which will have to be made, and will probably end up being more costly, simply in order to make up lost ground.  Britain is on the verge of suffering power outages, because of a lack of productive investment in power generation, and distribution; large parts of Europe are decades behind economies like Singapore, and even some emerging African economies, in terms of broadband and communications technology infrastructure.  Britain, is wasting money on HS2, which will be out of date by the time its completed, and is already 19th. century technology bring provided for 21st century requirements.  Yet, the much smaller investment required in broadband is being held back by the government.  Its meagre proposals do not even cover the whole country, and is only for the provision of 100 mbps speeds, whilst Singapore already has coverage of nearly all of the country at a speed of 1 gbps, and they are looking to raise it further!

The US, needs to spend huge amounts of productive capital, in replacing its crumbling infrastructure on rails, roads, bridges, and telecommunications.

In short, at the same time as the conjuncture is seeing a relative diminution in the availability of loanable money-capital, the objective laws of capitalist production, are creating the requirement for a sharp rise in the demand for such money-capital to fund this productive investment.  The consequence must be a sharp rise in interest, and corresponding collapse in the prices of fictitious capital.

Capital III, Chapter 15 - Part 34

But, as Marx says, as capital also takes the form of share capital, commercial bonds etc., which act as a claim on any future profits, the prices of this fictitious capital also fall, as the prospect of a share in losses rather than profits looms. So, the prices of shares and bonds fall.

Marx points out that the destruction of this fictitious capital, which arises periodically with stock market crashes, should not be confused with real economic crises. The bursting of stock market bubbles need have no serious long-term effects on the economy. On the contrary, the bursting of such bubbles is usually a good thing, as is preventing their inflation in the beginning. The blowing up of bubbles only signifies a transfer of wealth from the hands of one group of robbers to another – usually from the productive-capitalists and merchant-capitalists to the money-capitalists, and landlords – whereas the bursting of bubbles sends the flow in the other direction.

“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.” (TOSV2 p 496)

But, capitalism develops as a system based on money as means of payment rather than just means of circulation. In other words, it relies on credit. But, such a system depends upon prices remaining relatively stable. If capitalist X buys commodity A today, with payment due in 30 days, they need to know that the price of A will be not significantly different 30 days from now. Indeed, the supplier of A needs to know that too.

If a company has run up a series of payment obligations such as these, on the basis of existing prices, then if market prices fall substantially, in the intervening period, its obligations remain. The consequence is that what Marx calls, in Theories of Surplus Value, a crisis of the second form arises. That is a money crisis or payments crisis that originates in the relations of production, i.e. in the overproduction of capital. As he says in Capital I, this is different to a purely financial crisis which originates in the financial markets.

The consequence of this payments crisis is that buyers default on payments at numerous points, which then means their suppliers do not get paid, causing them to default and so on. The immediate consequence is a credit crunch, as everyone wants cash payment, and everyone wants to hoard cash. So, short term interest rates rise sharply. But, as economic activity seizes up, the opposite arises.

“A part of the gold and silver lies unused, i.e., does not function as capital. Part of the commodities on the market can complete their process of circulation and reproduction only through an immense contraction of their prices, hence through a depreciation of the capital which they represent.” (p 254)

Money-capital then becomes abundant, as demand for it collapses, causing interest rates to fall sharply.

“This confusion and stagnation paralyses the function of money as a medium of payment, whose development is geared to the development of capital and is based on those presupposed price relations. The chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction.” (p 254)

This period of stagnation, that arises in the Winter phase, of the Long Wave, prepares the new cycle via a number of mechanisms that Marx outlines. Firstly, in the period of prosperity, this causes workers to increase their numbers by more marriages, and because more children survive. This only raises the working-age population later, but the increased pressure exists on workers to maintain their families. This puts downward pressure on wages in opposition to the rise in wages of previous periods.

In this Winter phase, of the cycle, capital also seeks to reduce its costs, as part of the intensified competitive struggle for market share.

“...the fall in prices and the competitive struggle would have driven every capitalist to lower the individual value of his total product below its general value by means of new machines, new and improved working methods, new combinations, i.e., to increase the productivity of a given quantity of labour, to lower the proportion of variable to constant capital, and thereby to release some labourers; in short, to create an artificial over-population.” (p 255)

This is why it is during this Winter phase of the cycle, characterised by stagnation, that persistent unemployment arises, rather than during the previous periods, where over-exuberance leads to repeated crises of overproduction. In fact, this period of stagnation is characterised by the opposite of this over-exuberance. Rather than rampant investment in new additional capital (extensive accumulation), existing capital is bought up on the cheap. Its only where some new machine offers some significant competitive advantage that such investment is undertaken. Moreover, this intensive accumulation occurs as a result of worn out fixed capital being replaced with the latest technology, rather than just a simple like for like replacement.

Monday, 12 October 2015

Capital III, Chapter 15 - Part 33

As part of this competitive struggle, over who will shoulder the losses, the capitalist class as a whole must lose.

“How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist's interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.” (p 253)

The resolution of this contradiction arises via the destruction of capital value, to the extent of its overproduction. Again, its important to understand that it is the destruction of capital value, not physical capital that is important here, because some economists following Keynes, including some Marxists, have suggested that what is required for the restoration of profits and economic growth is the physical destruction of capital, such as happens during wars. This is contrary to Marx's argument. Marx makes clear, in Theories of Surplus Value, that it is the destruction of capital value that is the basis of the restoration of profits.

“When speaking of the destruction of capital through crises, one must distinguish between two factors.” (TOSV2 p 495)

One is the form of physical destruction described above, but it is the second form that is beneficial for capital.

“A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction.” (TOSV2 p 496)

Physical capital may be destroyed during such a crisis, because any physical capital, left unused, will deteriorate. Machinery rusts, material deteriorates, workers lose skills and so on. But, all of these things are negatives, not positives for restoring profits and growth. What capital needs, to restore its rate of profit, is to be able to mobilise all of this existing physical capital, but for it to cost it less to do so. If the physical capital is destroyed, capital has to endure the cost of replacing it, which is hardly conducive to higher profits! It is precisely this reduction in the value of the existing physical capital, that the crisis brings about.

“The main damage, and that of the most acute nature, would occur in respect to capital, and in so far as the latter possesses the characteristic of value it would occur in respect to the values of capitals. That portion of the value of a capital which exists only in the form of claims on prospective shares of surplus-value, i.e., profit, in fact in the form of promissory notes on production in various forms, is immediately depreciated by the reduction of the receipts on which it is calculated.” (p 254)

In other words, the capital value of existing productive-capital falls, rather like the process of “moral depreciation”, because the surplus value this capital can claim, as its share has fallen, That is particularly the case with those capitals, big or small, that go out of business, as part of this process. Their capital, in the shape of buildings, machines and materials, can then be bought up, at a much reduced cost, by their competitors, and put to work profitably. If firm A's cost of production is £10,000, but the market price for this production is £8,000, it makes a loss of £2,000. But, if firm B buys up A's capital, for £5,000, and sets it to work, it produces for it a £3,000 profit.

Given that these new owners are usually more dynamic and enterprising, than the former owners, and use the physical capital more effectively, they will usually increase its profitability even more than this.

Where the company has bought its productive-capital with borrowed money-capital, then as Marx describes here, the value of this fictitious capital also falls.  A bank, which loaned money to the firm, would have a claim for interest on the loan, out of the firm's profits.  It would hold the firm's collateral against it.  But, as the firm's potential for making profits falls, the potential for paying that interest falls.  The asset value of the collateral on the bank's balance sheet should be depreciated.

Where the firm has borrowed money-capital by issuing commercial bonds, the owners of these bonds likewise have a right to receive the average rate of interest on the money-capital loaned.  But again, as the potential for paying this interest falls, and the likelihood of default rises, the value of the bond should also be depreciated.

Finally, where the firm has borrowed money-capital by issuing shares, the owners of these shares also have a right to receive the average rate of interest, as dividends, on the money-capital they have loaned.  But, again, as the potential for paying these dividends out of profits falls, so the value of the shares falls.  All of these forms of fictitious capital - bank loans, bonds, shares - are thereby depreciated by the same factors that depreciate the value of the productive-capital, i.e. a reduction in the ability to produce profits, out of which the interest is paid.

Sunday, 11 October 2015

Capital III, Chapter 15 - Part 32

This overproduction of capital, that results in a fall in the rate of profit, need not immediately result in a crisis, particularly as Marx points out, that it may, for a time, be accompanied by a rising mass of profit. In fact, its this latter resulting from boom conditions, which encourages the continued accumulation of capital, even after this point of overproduction has been reached. But, the consequence of the overproduction and the reduced rate of profit is then to increase competition. That capital, which cannot then produce profits, or the average profits is depreciated, in much the same way as occurs with “moral depreciation”.

“It is evident, however, that this actual depreciation of the old capital could not occur without a struggle, and that the additional capital ΔC could not assume the functions of capital without a struggle. The rate of profit would not fall under the effect of competition due to over-production of capital. It would rather be the reverse; it would be the competitive struggle which would begin because the fallen rate of profit and over-production of capital originate from the same conditions. The part of ΔC in the hands of old functioning capitalists would be allowed to remain more or less idle to prevent a depreciation of their own original capital and not to narrow its place in the field of production. Or they would employ it, even at a momentary loss, to shift the need of keeping additional capital idle on newcomers and on their competitors in general.

That portion of ΔC which is in new hands would seek to assume a place for itself at the expense of the old capital, and would accomplish this in part by forcing a portion of the old capital to lie idle. It would compel the old capital to give up its old place and withdraw to join completely or partially unemployed additional capital.” (p 252-3)

Its important to reiterate here that this falling rate of profit has nothing to do with any long term tendency to do so, resulting from a rise in the organic composition of capital. Quite the contrary, this overproduction of capital, and consequent fall in the rate of profit can result even where the organic composition remains constant or even falling. It arises due to a rising mass of profits, which causes over-exuberance, and increased demand for productive-capital pushing up its price. In the Spring phase of the Long Wave, a high and rising rate and mass of profit encourages such accumulation, alongside a rise in the organic composition. But, the latter is a reflection of rising productivity, which creates relative surplus population. That, together with the continued existence of a large reserve army, from the previous Winter phase, of stagnation, means that any such overproduction is quickly overcome.

In the Summer phase, of the Long Wave, high rates and masses of profits continue, but begin to slow down, as productivity growth slows. But, it is in the Autumn phase, when the crises of overproduction are most acute. Then available supplies of labour-power have been used up, whilst productivity growth has slowed, to prevent a solution via the creation of a relative surplus population. The latter also restricts the extraction of additional relative surplus value. The slow down in technological development, here, means that the expansion of capital is extensive rather than intensive. That is, it takes place on the basis of the existing technical composition of capital.

Its in this phase that the big confrontations between capital and labour occur, such as the Paris Commune, the 1917 Russian Revolution, and the other European revolutions of the time, as well as the 1926 General Strike in Britain, and later the large scale confrontations of the 1970's and early 1980's. It is in the period after this, during the stagnation of the Winter phase, that reaction sets in, capital develops new technological solutions, that raise productivity and create new types of use value, raising both produced and realised surplus value, that the base for the new cycle is formed.

Saturday, 10 October 2015

Capital III, Chapter 15 - Part 31

This kind of absolute overproduction must affect the whole economy, as Marx says, because the rise in demand for labour-power causes wages to rise across the economy, whether in sections where the demand for labour-power is high or not. As described earlier in Capital, the assumption of a single rate of surplus value across the economy is based on this. If the rate of surplus value is lower in one place than another, competition will tend to even it out via competition for labour-power and wages. If additional supplies of labour-power exist in industries where the demand for labour-power, and wages are low, this additional supply would be attracted to where demand, and wages are higher.

The exuberance causes additional new capitals to be formed. Some of these will be created by workers themselves, thereby removing them from the labour market, but either way, these new capitals will provide a new demand for labour-power to be withdrawn from the market. Most of these new capitals, as was seen earlier, will fail, precisely because they are small. But, some will not. Some may succeed, because they have been started up using some new, more efficient method of production that gives them an advantage over existing capitals; some will succeed because they are producing some new use value, that captures a share of the market.

This can then materialise in various forms. Some of the new capital continues to operate only as means of production. That is it continues to produce commodities that are thrown on to the market, but no surplus value is created in this production. If the individual capital succeeds in making a profit, it is only because it has been successful in buying its inputs at prices below the market values; because it succeeds in swindling its workers, suppliers or consumers in some way.

But, more often, such small capitals not only cannot produce surplus value, they produce even less than the average capital employed in the same production. If they continue to operate, it is on the basis of producing no surplus value, and realising no profits. It is often only the very small scale of operation that allows this to continue for any length of time. This was described by Marx in Capital I, in relation to those small enterprises, sweat shops, where not only were the workers super exploited, but the owners of such enterprises worked themselves for below the value of labour-power.  It is a typical situation for some peasant farmers, share croppers and so on.  During this period, not only will any workers be asked to accept lower wages etc. but the owner, who is often still a worker of some kind, will not only accept lower wages themselves, but they may keep the business going by drawing on their own savings and assets to add capital, in the hope of better times ahead.

For those who are really just self-employed workers – as was the case with the hand-loom weavers, for example, this becomes particularly acute, as not only does their profit disappear, but their wages also fall below the level of subsistence. Its on this basis, that the 160,000 or more “zombie firms”, reliant on state handouts, in the form of subsidies to their workers, survive today.

In reality, this is capital that is not acting as capital, but only as means of production. But, some of this new capital does act as capital, does act to produce surplus value, for the reasons described above. To this extent, it replaces a portion of the existing capital. Again that may appear in two ways. On the one hand, a new efficient capital might take the place of an old inefficient capital, particularly where they are of a similar size. The former then produces a surplus value that can be realised in the commodities it produces and sells at the market value, but the latter now cannot, because its output has been replaced by that of the new capital. On the other, it may take the place of just a portion of some larger capital, which finds that it cannot make the same profit on all of its output as before. That may be because a portion of its output is produced inefficiently, or because although its output overall is more efficient than the average, it is not as efficient as the new smaller capital. The latter cannot replace all of the capital of the former, because its too small, but it can replace a portion of equal size.

“In reality, it would appear that a portion of the capital would lie completely or partially idle (because it would have to crowd out some of the active capital before it could expand its own value), and the other portion would produce values at a lower rate of profit, owing to the pressure of unemployed or but partly employed capital. It would be immaterial in this respect if a part of the additional capital were to take the place of the old capital, and the latter were to take its position in the additional capital. We should still always have the old sum of capital on one side, and the sum of additional capital on the other.” (p 252)

In fact, under these conditions, not only will the rate of profit fall, but the mass of profit may fall too, because the continued accumulation of capital, beyond the point where it can add surplus value, causes wages to rise so much that the rate of surplus value falls more than the quantity of variable capital employed rises. In fact, this situation that causes a crisis of overproduction is quite different to the conditions that Marx describes for the Law of The Tendency for The Rate of Profit to Fall.  Marx makes clear that for the latter to occur, the rate of surplus must rise (the consequence of rising productivity that is the corollary of the rising organic composition of capital, and the mass of profit is rising).  However, the conditions described that lead to a crisis of overproduction, are that the rate of surplus value is declining, because increased accumulation has caused wages to rise, and the elasticity of demand to rise, as higher wages cause higher levels of consumption.  Rather than the mass of surplus value, rising, as is the case with the Law of Falling Profits, it is falling, squeezed by these higher wages, and the inability to pass on higher input costs.  But, even if the quantity of surplus value does not fall, and if the rate of profit on the capital actually employed does not fall, the overall rate of profit must fall, because the total mass of capital, i.e. including that part which has been accumulated, but which does not act as capital, has risen. The same mass of profit, therefore, measured against an increased mass of capital, must result in a lower rate of profit.

“If a total capital of 1,000 yielded a profit of 100, and after being increased to 1,500 still yielded 100, then, in the second case, 1,000 would yield only 66⅔. Self-expansion of the old capital, in the absolute sense, would have been reduced. The capital = 1,000 would yield no more under the new circumstances than formerly a capital = 666⅔.” (p 252)

Northern Soul Classics - There was A Time - Gene Chandler

The times I've sweated to this!