Thursday, 30 October 2014

The Law Of The Tendency For The Rate of Profit To Fall - Part 57

Conclusion (3)

In setting out the Law, Marx wanted to demonstrate that the arguments that previous economists had put forward, which assumed that a falling rate of profit meant also a falling mass of profit, leading ultimately to a collapse of capitalism, were wrong. In Capital, and in Theories of Surplus Value, he devotes considerable time to demonstrating not only that the mass of profit can rise as the rate of profit falls, but that it MUST rise. He sets out to demonstrate that there is no reason, therefore, why this Law should lead to a collapse of capitalism.

“A distinction must he made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist.” 

Yet, ironically, it is on this basis of a continual fall in the rate of profit, that many of those who claim that the Law is the main or only basis of Marx's theory of crisis, rest their argument. It is in fact, on the same basis of the argument put forward by Ricardo, against which Marx was arguing, that those who believe the Law must lead to some ultimate collapse of capitalism, base themselves.

The law of falling profits, as really a Law about falling profit margins, within the context of a period of boom, exuberance and high rates of general annual profit, is an explanation of how this process leads to the build up of contradictions, which as Marx and Engels describe, are really contradictions based on the inability of the market to expand as fast as the production of use values, during such periods. The crisis of overproduction, is the means by which these contradictions are resolved, so that the boom continues, and it continues, precisely because underlying it, is the fact not of low and falling real rates of profit (the general annual rate of profit), but of high and often rising rates of profit!

The prolonged periods of economic weakness, inactivity and stagnation that are often considered the periods of capitalist crisis, are in fact, not usually the periods of acute overproduction. They are usually the opposite, the periods when capital does NOT over expand, does not over-accumulate and so does not over-produce. They are periods rather when realised money-capital rather than being accumulated in additional productive-capital, is hoarded, at periods used in speculation, and so on; they are periods when capital seeks to find solutions to the problems which caused the previous boom to end, as productivity slowed, due to the benefits of previous innovation being exhausted, and when the range of potential new use values into which capital could be expanded, became constricted.

The only basis on which the Law could represent a state of permanent stagnation, would be if the ability of capital, and its harnessing of science and technology to its needs, absolutely ran out of innovations by which new use values could be turned into commodities, providing capital with new lines of production into which, the released capital, and relative surplus population could be employed. At the moment, there is no indication of that being likely. In fact, the number of innovations seems to be increasing not decreasing.

Wednesday, 29 October 2014

Q.E. Ends

The Federal Reserve, at its meeting today, as expected ended its programme of quantitative easing. Its statement also suggests that it may begin to raise its official interest rates in the next three or four months.  Market interest rates in the global economy have already been rising over the last few months in response to the tapering of QE.

The huge injection of liquidity over the last few years has acted to put a floor under stock and property markets.  That floor has now been removed completely.  One effect of all that money printing was to make speculation in these assets almost a one way bet.  That meant that companies could borrow cheaply and buy back shares to pump up their share values.  Shareholders could be bought off from complaining about low dividend yields, by offering them large capital gains instead, as the price earnings multiple of shares was expanded.  That option now becomes more difficult.

If companies want to see their share price rise now, they will have to bring it about not by accounting manipulation, or technical tricks such as share buy backs, but by actually growing the companies earnings.  That means they need to invest much more, in order to expand the business.  An example of that was seen yesterday with Facebook which announced it was going to be increasing its investment spending, for precisely that purpose.  Similarly, Apple has seen its profit margins on iPhones and iPads, falls steadily over the last couple of years, as new versions have been seen to offer only marginal improvements over existing models.  To grow its earnings and raise margins, Apple needs to introduce new technologies, such as the Apple Watch, iPay and so on, but again, all of these things require large scale capital investment.

The effect of such capital investment, was witnessed in the reaction to Facebook's announcement.  Its shares fell sharply, because, although its earning grew, large scale capital investment will mean that less of future profits will be available for distribution to shareholders, and it may even require the issuing of additional shares, thereby diluting the value of each existing share.

The reality, is that QE has acted to blunt such capital investment over the last few years, because it has been more profitable to use available cash for speculative activity, rather than productive investment.  It has saved the insolvent banks, and the financial oligarchy, but at the expense of the real economy.

The ending of QE makes possible the reverse, an increase in productive investment as firms have to grow their businesses, but the consequence is that stock markets, and property markets will fall.  Bonds, prices, particularly the high yielding junk bonds, into which investors have had to flee in search of yield, have been pushed to historically levels that will also now fall.  Interest rates fell for 30 years after 1982, and have reached such low levels because of the massive rise in the rate and mass of profit over that period.

We now have the rate of profit starting to fall, whilst the demand for money-capital for this productive investment is set to rise.  As Marx sets out the  interest rate is determined by this interaction between the demand and supply for money capital.  The supply is falling relative to the demand, so interest rates are rising, and will continue to rise whatever central banks do.

Today is the 85th anniversay of the 1929 stock market crash.  There is a thirteen year cycle for stock market crashes.  Another such crash was due in 2013, following the crashes of 2000, 1987, 1974, 1962.  No such crash is likely today, and by their nature crashes usually occur when no one expects them.  But, as I have set out in my book Marx and Engels' Theories of Crisis: Understanding The Coming Storm, such a crash is inevitable, and it is inevitable despite, and partly even because the real global economy remains in a period of long wave boom.

Capital II, Chapter 20 - Part 17

Marx then demonstrates how this money flow can bring about these exchanges of value, by looking again at the exchange between Department 1 (v+s) and 2 (c). Marx assumes that Department 2 begins with £2000 in the form of commodity-capital and with £500 in money-capital. Department 1 begins with £1000 in money-capital, which it advances as wages.

Department 1

Department 2
1000 wages
Consumer goods
Means Of Production
Means of Production
500 surplus value
Consumer goods
Means of Production
500 surplus value
Consumer goods

Only £1500 has been used to finance the circulation of £5,000 of commodities here. At the end Department 2 has received £1,000 (1), £500 (4) and £500 (6), making £2,000 altogether. It has paid out £1,000 (2) £500 (3) and £500 (5), again making £2,000 altogether. So, their cash position is exactly as it was at the beginning.

They sold £2,000 of commodities and they replaced it with purchases of £2,000 of constant capital. So, they end up with £2,000 of constant capital also.

£1,000 of commodity-capital was used up in the commodities they sold to Department 1 workers (1). But, they obtained £1,000 in money from that transaction. They used that money to buy £1,000 of constant capital from Department 1 (2). Thereby, Department 1 capitalists receive back the £1,000 they had paid in wages to their workers.

Department 2 capitalists throw the additional £500 of money-capital into circulation they began with, and buy further means of production (3). With the proceeds, Department 1 capitalists buy £500 of consumer goods from Department 2 (4).

Department 2 use this £500 to buy additional means of production (5), and Department 1 capitalists use this to buy consumer goods (6).

Department 1 workers have bought £1,000 of consumer goods equal to their wages. Department 1 capitalists have bought £1,000 of consumer goods equal to their surplus value.

Department 2 capitalists have used up the £2,000 of commodity-capital they began with and have bought £2,000 of constant capital in its place, and have also recovered the extra £500 they threw into circulation to buy constant capital.

Department 1 capitalists have bought £1,000 of consumer goods to meet their needs, which is equal to their surplus value, but they also have £1,000 in money, which they can now once more advance as wages to their workers.

“On the other hand the bodily form into which the variable capital existing in the form of money must be transformed, i.e., labour-power, has been maintained, reproduced and again made available by consumption as the sole article of trade of its owners, which they must sell in order to live. The relation of wage-labourers and capitalists has likewise been reproduced.” (p 420) 

In advancing the £500 at (3) for the purchase of additional means of production, Department 2 capitalists thereby anticipate its reflux, i.e. they assume that their future output will actually find a buyer. The money they throw into circulation makes this possible, but, of course, there is no guarantee that it will be the case. Simply because a seller has sold does not mean they are compelled to buy.

Tuesday, 28 October 2014

The Law Of The Tendency For The Rate of Profit To Fall - Part 56

Conclusion (2)

In Capital III, Marx and Engels again set out the role of the rate of turnover on the annual rate of surplus value, and consequently on the annual rate of profit. They do so, specifically in Chapter 4, and they also mention its role, at length, in Chapters 9, 10, 13, and 18 to particularly warn against the dangers of simply treating the rate of profit, on the basis of the annually laid-out capital, as opposed to the capital advanced for one turnover period. Yet, nearly all the arguments over whether the rate of profit has been rising or falling over recent decades, as well as being really a measurement of the rate of surplus value rather than the rate of profit, have been based on measurement of profit relative to the annually laid-out capital rather than the advanced capital.

Having described at length how the rate of turnover of the circulating capital significantly impacts the annual rate of surplus value, and annual rate of profit, Marx and Engels in their explication of the Law, then again do so on the same basis that the entire work has been written. It focusses on the essential features of the Law without adding in this further complexity. The explanation of the Law is given on the basis of a single turnover of the capital, just as the initial description of the rate of profit, and development of a general rate of profit had been done. The rate of profit is repeatedly stated as being s/C, where s is the total surplus value for the period, and C is the advanced capital. But, as Engels warns,

“The rate of profit is calculated on the total capital invested, but for a definite time, actually a year. The rate of profit is the ratio of the surplus-value, or profit, produced and realised in a year, to the total capital calculated in per cent. It is, therefore, not necessarily equal to a rate of profit calculated for the period of turnover of the invested capital rather than for a year. It is only if the capital is turned over exactly in one year that the two coincide. 

On the other hand, the profit made in the course of a year is merely the sum of profits on commodities produced and sold during that same year. Now, if we calculate the profit on the cost-price of commodities, we obtain a rate of profit = p/k in which p stands for the profit realised during one year, and k for the sum of the cost-prices of commodities produced and sold within the same period. It is evident that this rate of profit p/k will not coincide with the actual rate of profit p/C, mass of profit divided by total capital, unless k = C, that is, unless the capital is turned over in exactly one year.”

Capital III, Chapter 13 

Engels then goes on to provide three examples which show the effect of the process, by which the organic composition of capital rises, causing the rate of profit to fall, and yet, which at the same time, cause the annual rate of profit to rise. And these examples, and the discussion in Chapter 13, of the rate of profit as defined for the purposes of describing the Law, as profit in relation to the cost-price of commodities, p/k, as opposed to the annual rate of profit, illustrates the other problem of the discussion over it.

Marx and Engels, had a particular reason for using this definition of the rate of profit in explaining the Law. Part of Marx's reason for setting out the Law was to show that the formulation of previous economists such as Mill, Say and Ricardo was wrong. They believed that the falling rate of profit was connected to a falling mass of profit. Marx wanted to show that even as the rate of profit fell, the mass of profit must rise, because these are caused by the same process of an expansion of capital and rise in social productivity. The reason that p/k falls is because productivity rises, as a consequence of an expansion of capital. This is manifest in a massive expansion of the quantity of commodity units produced. The profit per unit falls, but not by as much as the quantity of units produced expands, so the mass of profit continually rises, despite these falling profit margins. The two things are different sides of the same phenomena.

In other words, the Law as set out by Marx and Engels is really a Law of falling profit margins, because as Engels sets out above, p/k is the same thing as the total surplus value divided by the total laid-out capital plus wear and tear of fixed capital, because the former is p multiplied by the total quantity of commodity units, and the latter is k multiplied by the total number of commodity units. Its on this basis that these falling profit margins create the potential for crises of overproduction, even as and even because the actual rate of profit, the general annual rate of profit is rising, along with the mass of profit.

Because, the annual rate of profit is rising, i.e. the profit measured against the capital actually advanced including the fixed capital, and along with it the mass of profit, this causes capitalists to expand rapidly, it causes former managers and workers to borrow money-capital to set up in business themselves and so on. As a consequence, the total quantity of commodity units produced increases rapidly, whilst profit margins decline. For the reasons set out in Capital IIIChapter 6, of this sharp rise in activity, pushing up demand and therefore the market price of inputs, including labour-power, those profit margins get squeezed even more. The more these profit margins are squeezed, the higher the potential for overproduction, for the number of commodities thrown on to the market to rise so much that demand fails to expand enough to absorb it all, at market prices that are higher than the cost-price.

As I'll examine next, its for this reason that the Law cannot be seen as the basis, and certainly not the only basis of Marx's theory of crisis.

Monday, 27 October 2014

Capital II, Chapter 20 - Part 16

All capital is comprised of commodities. Productive-capital is comprised of the commodity labour-power, and the commodities that make up the means of production. The end product, the commodity-capital, is most obviously comprised of commodities. But, money-capital is comprised of the commodity money too.

All of these commodities are consumed. The productive-capital is consumed in the productive process. The commodity-capital is consumed either as consumer goods or as means of production itself. In the process of the consumption of their use value, the value of these commodities disappears too, thereby necessitating the expenditure of labour once more.

Even the money commodity wears out in use, but it is the money function that continues, and with it thereby continues to circulate value.

On one side, to effect these exchanges, there is then money, and on the other there has to be commodities against which it exchanges. At this stage it is assumed that these commodities really are commodities, i.e. they are use values that someone wishes to purchase at their exchange value. There are, of course, any number of reasons why this may not be the case, as many capitalists discover in trying to sell their products.

In the real economy, because each firm starts in business at different times, and because each industry, and even firm, will have different working periods, and turnover times, money will be continually thrown into and withdrawn from circulation, either as advances of capital or as revenue. Similarly, commodities of varying types will be continually thrown into circulation, and just as continually withdrawn either for immediate consumption, or to be used themselves in the production process.

As demonstrated, the money flows that accompany these transactions can follow an unlimited number of paths. Money spent from wages by workers in Department 1, can be destined to various locations to cover rent, food, clothing etc. The Department 2 capitalists, or, in the case of rent, landlords, might themselves spend this money on consumer goods. Its only when the aggregate of Department 2 capitalists is considered that the flow of these funds back to Department 1 capitalists can be observed.

“However, the money-capital converted into variable capital, i.e., the money advanced for wages, plays a prominent role in the circulation of money itself, since the labourers must live from hand to mouth and cannot give the industrial capitalists credit for any length of time. For this reason variable capital must be advanced in the form of money simultaneously at innumerable territorially different points in society at certain short intervals, such as a week, etc.—in periods of time that repeat themselves rather quickly (and the shorter these periods, the smaller relatively is the total amount of money thrown at one time into circulation through this channel) — whatever the various periods of turnover of the capitals in the different branches of industry. In every country with a capitalist production the money-capital so advanced constitutes a relatively decisive share of the total circulation, the more so as the same money, before its reflux to its point of departure, passes through the most diverse channels and functions as a medium of circulation for countless other businesses.” (p 418-9)

Sunday, 26 October 2014

The Law Of The Tendency For The Rate of Profit To Fall - Part 55

Conclusion (1)

The debate over Marx's Law of the Tendency for the Rate of Profit to Fall is largely based on false premises. The debate essentially has a number of aspects. Firstly, is there any such Law to begin with; secondly, is this Law a basis, or even the only basis of Marx's theory of crisis; thirdly does the Law mean that capitalism must increasingly become prone to crisis, as the rate of profit falls ever lower over time, so that it necessitates either the collapse of the system, or its revolutionary overthrow; fourthly, does the Law explain specific crises, such as that of 2008/9?

In what I have set out above, I have tried to show that the answer to these questions is respectively, yes, but its not the Law that some believe it to be; no and emphatically no; no, at least on the basis of the information we have currently; and finally no.

Part of the problem is that Marx was writing an analysis of capital, and attempting to present that analysis in a way that develops both historically and logically. Part of the method for that involved describing Laws in their most basic and pure form, so as both to elaborate their essential features, and to make it easier to understand them, without the complication of additional complexity, even though in order to understand how such Laws actually operate in the real world, it is vital to build the model in such a way as to introduce all of that complexity. That is why, Marx begins not by analysing capital, but analysing the commodity; it is why he starts not by analysing capitalist production and exchange, but simple commodity exchange by primitive peoples, and the necessary development from it, of simple commodity production and exchange by peasant producers; its why from this basis he analyses the development of the product into the commodity, and the simultaneous development of value into exchange-value as a result of the exchanges of these primitive peoples, but also continues this assumption of commodity exchange on the basis of exchange-value under capitalism, even though he states that he knew this was not the case. As Engels describes, they knew that from the start of capitalist production in the 15th century, it was no longer possible for commodities to exchange on the basis of exchange-value, because commodities produced by capitalist means sold at market prices determined by prices of production, so to the extent these commodities also comprised inputs for other producers, their cost prices were no longer simply determined by exchange value. Yet, it was not until Capital III, that Marx drops the assumption that commodities exchange at their value, and sets out the complexity of prices of production. Even then, for ease of explication, he still uses the assumption of exchange on the basis of exchange value, in many instances.

The same is true in relation to the rate of profit. As early as Capital II, Marx sets out the effect of the rate of turnover of the circulating capital, on the annual rate of surplus value, and consequently on the annual rate of profit. His analysis of that effect is extensive, and central to his analysis of the circulation of capital. Yet, having explained at length this actual basis of the annual rate of surplus value, he rightly does not complicate all of his further examples, and explanations by continually making a distinction between the rate of surplus value and the annual rate of surplus value. Perhaps, if he'd known the debates over the Law would have taken the shape they have, he might have done so.  On the other hand, given his original intention, to have provided an economic work that was much closer to the real world, he may have been content to have left such a presentation until that time. But, then a look at what Marx actually says, in itself should be sufficient to uncover the real basis of the Law. I'll review that in the next part.

Saturday, 25 October 2014

Northern Soul Classics - Come Go With Me - Gloria Jones

A magical piece of 1966 Northern from Gloria Jones, who also gave us the Northern monster "Tainted Love".