Friday, 5 February 2016

Friday Night Disco - Special Delivery - Polly Brown

This is one of a number of songs by Polly Brown, I might have chosen from the time.  She was lead singer with Pickettywitch, which brought a number of memories back to me, of someone from the Torch and Top Rank, in the Summer of 1971.

If Life Were A Computer Game.....?

If life were a computer game, what genre would it be, and how would you know if you had won? In the last week or so, I have been in a bit of a melancholy and reflective mood, thinking about the past. Its that, I suppose, that brought this question to mind, on the basis of wouldn't it be great if life really were a computer game, so that you could get a do over, of all those things you feel you got wrong, or would now do differently.

Let me start by assuring readers that this is not going to be a whiny piece about how terrible and unfair life is, and how mine could have been better. Quite the contrary. Whenever I play computer games, I always choose the highest difficulty level, because then the sense of achievement is that much greater when you succeed. In many ways, on that basis, I feel quite happy about my performance. I'm not a multi-millionaire, but I never had that as a goal. I could look back and think, if I'd bought £1,000 of Microsoft shares in 1980, I would be a multi-millionaire, but the fact that I didn't doesn't cause me to lose any sleep whatsoever, because to have known to have done so, is a bit like saying if I'd known what the winning lines on the football pools, or later the winning lottery numbers were going to be, I could also have been a multi-millionaire. Its like playing Sim City, and saying, I really should have known when Godzilla was going to appear, and destroy the city!

In terms of difficulty level, everything is relative. Compared to someone being born, at the same time, in an underdeveloped country, my difficulty level was set to easy, but in terms of people in Britain, it was set to at least hard. My parents were not poor, but unlike most of my friends, both of whose parents worked, only my father worked, and his wages were not great. Added to the initial difficulty, was the ill-health I had as a child, nearly dying from pneumonia, which was not helped by living in a cold, damp house, with only cold running water.

So, the fact that, whilst not being a multi-millionaire, I have a comfortable existence today, of a kind that my parents could not have imagined, and which I could not have imagined, even, when I was say sixteen, I count as a reasonable performance. Although, I remember, when I was about five or six telling the infant school teacher that, when I grew up, I wanted to be a Professor, whilst the other boys in the class wanted to be train drivers, or footballers, by the time I was leaving school, I was happy to just have a job, and my thoughts for the future extended no further than going to the Torch, or the Top Rank at night time, and whatever girlfriends I might meet up with. The idea that, less than ten years later, I would be going to University, never entered my head.

The fact that I was able to overcome ill-health, and be quite good at a range of sports, and other physical activity, including martial arts, and that I was able to dance all night without chemical assistance, I also class as a reasonable performance. A few years ago, I undertook a range of assessments at the gym, which showed that my biological age was 27!  But, there are quite a few things that I haven't been able to succeed at. Yet, I don't feel any regret, or need for a do over on any of those things either, just like I don't lose any sleep over not buying Microsoft shares, or picking the winning lottery numbers.

The things I would want a do over for, are those things, which in sport would be considered unforced errors. In other words, they are the things that you look back at, and think, “why on Earth did I do that?”, or, “why on Earth did I not do that?” Most gamers learn, early on, to save frequently. When I used to spend a lot of time playing computer games, however, sometimes I would get so engrossed in the game that I would forget about regular saving, up until that point when things went pear shaped, and lead, indeed, to one of those situations, where you think, “why did I forget to save?” Regular saving means that you can have a do over from before you made the mistake, without having to play the whole game again.

"The Moving Finger writes: and, having writ,
Moves on: nor all thy Piety nor Wit

Shall lure it back to cancel half a Line,

Nor all thy Tears wash out a Word of it."

The Rubaiyat, of Omar Khaiyyam
I'll come back to that later.

An example, of the kind of thing I mean is this. Although I always preferred to play football, and played for a youth club team, on a Saturday, my school played rugby union. After I had overcome pneumonia, I started to play for the school team. I started out as a front row prop, but quickly settled in to the position of wing-half, because I have always been bloody fast. When we used to play Rallyo at night time, I would even run in heavy boots, so as to get faster. The only other lad faster at the time, was called Frankie Cooper, who used to run in wellies!

The school used to play Westwood High School, in Leek, every year. Every year, our school would lose. I remember playing, early on, at their school, when I was still a prop, and their opposite kept dropping the nut on me, as we went into the scrum, until after it happening a few times, I dropped my foot into the back of his leg, when the ref wasn't watching. On the next to last day ever, for me, at school, we played them again. It was near the end of the game, and we were level pegging. We got a line out, and I said to my mate that he should throw the ball over the top of the line, and I would fly from nowhere to catch it. It worked perfectly. There was 100 metres to run to their touch line, and they had just one back on it. I put my head down and sped towards the line like a bullet. Within seconds, head still down, I saw the line and dived over it, only to realise, the moment I dived, that it was the five yard line!

Had I scored, we would have won, for the first time ever against them. Now there was no time left in this game, and for me, no chance ever of changing that. The next day, in assembly, the headteacher made light of it. For him, it was no big deal, for me it was an unforced error, and a tragedy, worse than missing a penalty. If I'd just looked up, I would have known it was the five yard line, and that there was a clear path to their touch line. For days, I thought I would never get over the feeling in the pit of my stomach, as I replayed the event over and over again. Had personal computers and computer games existed at the time, I probably would have wished that life was a computer game, so that it could be restarted from the previous save point. Today, although I still remember the event with annoyance, I probably wouldn't go for a restart, but settle for correcting the error the next time I played the game.

Actually, having been thinking about this, its changed the way I think about other things.  I've always thought that it would be preferable to be able to live forever.  But, when you think about it, in these terms, maybe not.  No mater how long I live, I could never change the events of that day.  But, if life really were a computer game, the only way of replaying that day, would be to play the game again!

So, there seems a distinction between different types of choices. There are those things where really any wrong choices you make cannot be classified as an error, because without cheating, there is no way of being able to guarantee making the right choice, for example, the winning lottery numbers. Then there are those choices where you have done all that was possible to obtain the best outcome, and yet you fail. For example, the last computer game I played was Generals, again on maximum difficulty, a few years ago. Having completed several levels, I came to a level that I just could not complete. My son, Simon, who had completed it all, on an easier level, then tried it several times and failed too. After some investigation, it turned out that the level had been modified, and no one could complete that level on maximum difficulty.

In short, if you have done everything you can, then, for me at least, I lose no sleep over failing to get the right lottery numbers, or win the game. What would cause me to want a do over, are those unforced errors.  And most of them are similar to that mistake of diving over the five yard line. Unforced errors come down to either recklessness or procrastination.  Had I looked up, obtained the necessary information and only then acted, it would have been avoided.  Either I would have realised where I was, taken five more strides and then dived, or I would have seen one of their players heading towards me.  Had I been stopped, it would have caused me no lost sleep, because I'd been stopped plenty of times before.  I have a strong memory as a teenager, of playing football one Summer Sunday morning, down at Goldenhill Rec, when I jinked around six players, before scoring. Even my old school friend Phil (Jack) Hall, who went to play for the Vale, for a short time, expressed his appreciation of the performance.  But, I don't lose any sleep over the many, many more times when I didn't score, because I was stopped!

As I said earlier, at the time, I would probably have wanted to do a restart from a saved game, having dived over the five yard line, rather than the touch line, and there are lots of similar unforced errors, since that time.  Not scoring on that day, in the end didn't change my life, but others did, or could have done.  I would love to be able to correct them, because there is a difference between trying and failing, and simply making an unforced error, as a result of recklessness, of making assumptions (its the touch line) without asking questions, to verify the assumptions, and so on. As Shakespeare put it, "Its better to have loved and lost, than never to have loved at all."  That is the difference with a computer game. Or is it?

When I was studying Philosophy, and like all Philosophy students, a lot of time was taken up, at the commencement of study with the question “Do We Exist?” The answer was given by Descartes a long time ago - “I think, therefore, I am.”   As Descartes went on to note, the fact that I exist, because otherwise I could not think, and ponder the question, does not answer the question of what “I” am. As I recall saying to my Philosophy tutor, at the time, before personal computers, and even Atari video games, it does not rule out the possibility that the “I” is some kind of avatar (though I didn't use that term) that “thinks” on the basis of some pre-ordained set of rules, but which only exists within the “mind” of some superior being, which can just as easily be a computer, or game player as a God.

The noted scientist, Ernest Wood, writes the following in his book on Yoga.

“One day, a teacher of meditation (guru) told one of his pupils to walk to the far end of the room and back, and sit down. Then he asked:

'What were you doing just now? Were you walking?'

The pupil went over his action mentally, and observed everything that he had done, and then replied:

'I was not walking. I was watching the body walk.'

Next the teacher held up a flower and asked him to meditate upon it for a few minutes. After this had been done, the teacher questioned:

'What were you doing just now? Were you meditating?'

After due observation and reflection the pupil answered:

'I was not meditating. I was watching the mind meditate.'

In this manner the pupil acquired a sudden discrimination between the self and the mind. He had a momentary release from the thought of himself as mind.”

This is very similar to the idea of the mind and body being an avatar, observed by the real self, for example, sitting at a computer. What is more, the greater knowledge we obtain about the true nature of reality, the more this becomes less an absurd concept. Some of the latest theories about the nature of reality reduce it to being essentially a set of mathematical equations, which set the laws of nature within which this reality is manifest. Everything that we consider solid is nothing of the kind. All matter is comprised of particles, which themselves increasingly appear to be constituted of nothing. Everything at a quantum level is reduced to a series of probabilities. The uncertainty principle itself depends upon observation.

Within a century, computing power will have increased to such a degree that it will be possible to create a computer model of the universe and everything in it. We have robots being developed along with a development of artificial intelligence. On the one hand, it has been estimated that within a century, the probability that we really are just avatars within a computer simulation, will be greater than that we are what we think we are. There is no reason why an avatar or a robot with AI would not consider that their action of thinking was any different to our own. Our own brains only think by following a set of physical laws.  String Theory physicist, Dr. James Gates,  found self-correcting computer error code embedded within the fundamental structure of String Theory, which made him "question if (he) was living in the Matrix." 

Moreover, scientists like Martin Rees have pointed out that the conditions required for the current Universe to exist are so fine tuned as to be more likely the result of design than chance.  That has obviously been picked up on by Creationists, but Rees himself proposes, as an alternative, the existence of a multiverse comprising an infinity of different universes, of which ours is just one. But, its equally possible that the reason this impossibly small margin of fine-tuning, required for our existence, is the result of our existence being the consequence of that existence being merely a simulation, and so those parameters are fixed and defined in the programming of the simulation.

It has always seemed odd to me that our own brains come within this context.  The human brain is just big enough to be able to perform the kinds of thought processes undertaken here, and experience self-consciousness, but a larger brain would be less efficient, because of the gaps between the synapses. Why we have such a brain today, is explicable in terms of its evolution to deal with all of the things about our world we need to understand and manipulate, but that does not explain why Man had this capacity of brain to begin with.  Our brain today is no different to that of the first modern humans, who would have had the advantage of intellect over other animals, with a much less complex brain than, in fact, they had.  I have also puzzled over the question of why, given the obvious evolutionary advantage that intelligence gives to a species, it was only humans that developed such a brain, in a relatively short time, whereas dinosaurs who were around for a much longer period of time, never witnessed the development of an intelligent dinosaur?

Its twenty-five years now since I first became interested in Virtual Reality, and the latest systems are making it even closer to the kind of situation described above, whereby the self exists in a different world and reality, to the virtual world in which their avatar operates. A quarter of a century ago, there was already development of teledildonic suits, which as the name suggests, allow the wearer to have all of the sensations related to the actions in the virtual world, which their avatar is experiencing.

Even the concept of restarting from a save point in such a world may exist without any of us knowing it. Imagine that you are, in fact, only an avatar. As in a computer game, you make some terrible mistake. The real self then restarts to a position in the game of life prior to the mistake. But, for you, as the avatar, your consciousness only exists currently, i.e. from the point of the restart from the save point. You would not know that you have made some awful mistake that got you killed. It would be like one of those dreams, where something awful is about to happen, but then you half wake, and a different scenario resumes.

Why don't you experience every such game as a bowl of cherries, as every mistake is corrected? For the same reason you don't restart from a saved point in any other computer game. Some mistakes are liveable with, and the game would be boring if it had no challenges. The aim is to improve your skill levels, learn from the mistakes, and avoid the unforced errors. It could be argued that, however well you do in the game of life, you always lose, because you die. But, the same applies to every computer game. No matter how well you do, even the act of winning itself, brings the game to an end.

And that it seems to me is the answer to the question, "How would you know that you had won?"  In the end, playing any computer game is about the enjoyment from playing the game.  In fact, if it was too easy, or you played it every time and won, it would be time to move on to a new game.  So, the way to win the game of life, is to enjoy playing it.  As Ernest Wood suggests according to the teachings of Yoga, treat every mistake not as a mistake, but only as a different experience from which to learn.

Anyway, its cheered me up at the prospect, because I'd definitely play this game again, both because there are lots of things I'd like to repeat, and because there are some unforced errors I would like to avoid next time round.

Capital III, Chapter 26 - Part 1

Accumulation of Money-Capital. Its Influence on the Interest Rate

“"In England there takes place a steady accumulation of additional wealth, which has a tendency ultimately to assume the form of money. Now next in urgency, perhaps, to the desire to acquire money, is the wish to part with it again for some species of investment that shall yield either interest or profit; for money itself, as money, yields neither. Unless, therefore, concurrently with this ceaseless influx of surplus-capital, there is a gradual and sufficient extension of the field for its employment, we must be subject to periodical accumulations of money seeking investment, of more or less volume, according to the movement of events. For a long series of years, the grand absorbent of the surplus wealth of England was our public debt.... As soon as in 1816 the debt reached its maximum, and operated no longer as an absorbent, a sum of at least seven-and-twenty million per annum was necessarily driven to seek other channels of investment. What was more, various return payments of capital were made.... Enterprises which entail a large capital and create an opening from time to time for the excess of unemployed capital ... are absolutely necessary, at least in our country, so as to take care of the periodical accumulations of the superfluous wealth of society, which is unable to find room in the usual fields of application." (The Currency Theory Reviewed, London, 1845, pp. 32-34.)” ( p 414)

As was seen in Capital I, a powerful source of primary accumulation of capital, in Britain, in the 18th century, was the National Debt. The state engaged in what was essentially large-scale Keynesian fiscal intervention. The debt/GDP ratio rose to 250% (compared to around 70% currently) as large scale state spending on the building of infrastructure took place that was required for the Industrial Revolution, and creation of a modern capitalist economy. A similar process occurred after WWII.

The fiscal intervention, in the 18th century, acted as a source of primary accumulation, because the productive capacity existed to utilise the credit that was created on the back of state spending and borrowing. The borrowing is financed essentially by two sources. Firstly, as seen previously, one means of banks loaning out funds is to create deposits. If A wants to borrow £1 million from bank X, then bank X creates a deposit of £1 million in the account of A. A then spends this money, which creates deposits in the accounts of those to whom he makes payments, and so on.

If banks only retain 10% of deposits, and loan out the remaining 90%, the result is that credit is created that is ten times greater than the original money deposited. But, money did have to be deposited in the first place, or else had to be established as bank capital.

This bank capital, or these deposits, initially came from the wealth of the old exploiting classes, as well as from the profits from loaning out interest-bearing capital, that the banks had accrued over centuries.

As Mercantilism drew in large profits from trade, such as the Triangle Trade, shipping slaves in one direction, and sugar and other commodities in the other, as well as from huge amounts of plunder acquired by pirate/merchants, like Drake and Raleigh, so this money-capital grew. But, as industrial-capital proper develops, increasing amounts of surplus value is realised, as potential money-capital, which, for the reasons described in Capital II cannot all be advanced again immediately, as productive-capital. So, an increasing amount of capital assumes the form of money-capital.

But, to act as money-capital, it must be loaned out at interest. As the above quote indicates, in the period prior to 1816, it could be placed on deposit with banks who loaned it to the state, as well as creating additional sums of credit, on the back of those deposits, and it was also used by those with sufficient sums to buy government paper themselves directly.

Thursday, 4 February 2016

Capital III, Chapter 25 - Part 8

The consequence of all this swindling, to obtain credit, to speculate in railway shares, is very similar to the swindling that took place in the run up to the financial crisis in 2008. In 2008, credit was obtained on the basis of selling mortgage backed securities, which in turn were based on the fraudulent sale of mortgages to people who could not afford the houses they were being persuaded to buy. A similar thing happened in Britain in the 1980's, with council tenants being persuaded to take on mortgages to buy their council house. Once interest rates rose, thousands found they could not afford these mortgages and lost their homes. The effect, in both cases, was to create a fictitious demand for houses that created a property bubble that then burst.

In 1847, loans were made against bills of exchange for commodities that had not been sold. On the basis of these loans, not only was a speculative bubble blown up in railway shares, but the fictitious demand for commodities also caused commodity prices to be higher than they would have been, and loans were also made against these inflated prices.

““I believe if it had not been for the accommodation thus granted, and principally by the Liverpool banks, cotton would never have been so high last year as it was by 1½ d. or 2d. a pound."” (p 411)

The consequence in 1847, was that as soon as interest rates rose, as a result of the action of the Bank of England, the speculative bubble in railway shares burst. But, also, as the process of extending credit to pay for past credit was brought to a halt, it became obvious that the value of the trade on which loans had been made was itself fictitious.

In the same way, in 2008, it became obvious that the value of property against which mortgages had been given was wholly fictitious, and when it was no longer possible to keep inflating the bubble by extending further credit, collateralised on those fictitious property values, not only did the financial bubble, blown up on all of the financial derivatives, established on the back of those mortgages, burst, but the value of the property itself collapsed.

That was not just a phenomenon restricted to the US. The US was simply the first place where that happened. But, the same speculative frenzy and swindles existed wherever privately owned residential property, as opposed to rental properties, formed a significant part of the housing sector. So, the same bubbles and swindles existed in Ireland, Spain, Britain etc., and the final collapse of those bubbles and swindles was only delayed by the actions of states and central banks in 2008-9.

Wednesday, 3 February 2016

The Average or General Rate of Profit

Every society, other than the most primitive, produces a social surplus. Marx demonstrates that there is an objective basis for this surplus. Society's output divides into three components or funds.

Firstly, a proportion of output in each year is attributable not to what has been produced in that year, but what has been produced in previous years. The tools and weapons used to hunt for animals, to catch fish, or cultivate crops are produced in previous years, and only used in the current year. The same is true with livestock, which has been bred over previous years, and which provides the dairy products and meat consumed in the current year. But, if any society is to at least continue to reproduce itself on the same scale, let alone to expand, it must likewise establish a fund, out of which all of these means of production are replaced, when they wear out. This fund replaces the livestock that has died, or been slaughtered, it repairs or replaces the agricultural implements, the fishing nets, and other tools that have worn out. None of this output enters in any way into the society's consumption fund.  It forms no part of society's revenue.

Secondly, there is the consumption fund. At every stage of history, there is a minimum level of subsistence that the producers must consume to reproduce their labour-power. Unless they eat enough, they will die from starvation, or be unable to produce, unless they have sufficient clothing and shelter, they will die from exposure, and so on. Once again, what they consume must first exist to be consumed. It must have been produced. For the very first human societies, that production may have been undertaken by nature. But, the limits of nature's free gifts soon impose themselves unless they are expanded by the addition of labour. Even hunter gatherers have to hunt and gather. The labour undertaken in any period, therefore, must be at least sufficient to replace the means of consumption, produced in previous periods, and consumed in the current one, in order that labour-power itself is reproduced.

The basis of the surplus product, as Marx outlines, is that this quantity of social labour, required to reproduce labour-power, is always less than the amount of labour which can be performed, by that labour-power. That can be summed up in the way that Marx does, that the social working day divides into two parts, necessary labour, and surplus labour, into a necessary product, and surplus product. This surplus product, and surplus labour-time constitutes the third fund, into which society's output is divided. It can be used to accumulate additional means of production, and thereby to increase productivity and output in future years. But, it can also be used to enable a portion of society to consume without producing, and on the back of it to raise itself up above the rest of society. It is the material foundation for all class division, and the establishment of a class society.

“The specific economic form, in which unpaid surplus-labour is pumped out of direct producers, determines the relationship of rulers and ruled, as it grows directly out of production itself and, in turn, reacts upon it as a determining element. Upon this, however, is founded the entire formation of the economic community which grows up out of the production relations themselves, thereby simultaneously its specific political form. It is always the direct relationship of the owners of the conditions of production to the direct producers — a relation always naturally corresponding to a definite stage in the development of the methods of labour and thereby its social productivity — which reveals the innermost secret, the hidden basis of the entire social structure and with it the political form of the relation of sovereignty and dependence, in short, the corresponding specific form of the state.”

(Capital III, Chapter 47)

In every society, the size of this surplus product, is determined by the amount of surplus labour that is performed. That depends in the first instance on the amount of necessary labour that must be performed. If the producers must work for ten hours per day, simply to reproduce their consumption fund, that will leave little time during the day, when they can be performing surplus labour. In less developed societies, that is all the more the case, because the ability to perform labour depends upon their being daylight, and so on. The longer the labourers work, or can be made to work, during the day, the greater their total product will tend to be, and so the greater the surplus product will tend to be. But, as Marx points out, even this “absolute surplus value”, is dependent initially on “relative surplus value”, because until society reaches a minimum level of social productivity, not even slave based production can exist. The slave must produce more during the day, than is required for their own reproduction. The higher the level of social productivity, the smaller the portion of the day constituting necessary labour becomes, and so the greater the potential for creating a larger social surplus.

But, it is these objective limits, which, in each society, not only determine the size of the social surplus, but which also determine its proportion to the other two funds, and thereby determine the basis upon which the exploiting classes can appropriate it. In feudal societies, for example, rent arose because clan and tribal chiefs were first provided with tribute, as a result of success in some battle against another tribe. The tributes occurred for other reasons, for example, as part of wedding ceremonies, and so on. Over-time, the tributes became regularised, and ritualised, so that the clan or tribal chief, who became the Lord of the Manor, acquired the right, merely on the basis of their rank and status, to receive such tribute as rent.

But, the objective basis for that rent remained. In order for the peasant producer to be able to continue to produce, they had to continue to meet their and their family's basic requirements to reproduce their labour-power. It was only whatever labour-time was available after that was done, which could be provided gratis to the landlord as rent. So, the first forms of this feudal rent, appear as labour rent, whereby the peasant worked for three days of the week on their own land, and the other three working on the land of the landlord, for free.

This social surplus product, thereby also sets the limit for what can be sustainably deducted in the form of interest by money lenders, and profit by merchants. But, as Marx describes, prior to industrial capitalism, the effects of both interest-bearing capital, and merchant capital, was to destroy existing modes of production, and to reduce the producers to conditions of slavery. Merchant capital establishes a general rate of profit, on the basis of its operation as a monopoly. These monopolies arise on the basis of merchant guilds and royal charter, for example, with the British and Dutch East India Companies.

Engels describes in detail the formation of merchant companies and corporations, in Germany, which, like the guilds, develop out of the mark associations, which, in turn, grow out of primitive communism. Initially, in the mark association, each peasant had an equal area of land.

“After the mark had become a closed association, and no new hides were allocated any longer, subdivision of the hides occurred through inheritance, etc., with corresponding subdivisions of the common rights in the mark; but the full hide remained the unit, so that there were half, quarter and eighth-hides with half, quarter and eighth-rights in the mark. All later productive associations, particularly the guilds in the cities, whose statutes were nothing but the application of the mark constitution to a craft privilege instead of to a restricted area of land, followed the pattern of the mark association.”

(Capital III, p 900-01)

In other words, these associations operate as closed monopolies, and in respect of the merchants associations, each merchant obtained an equal profit, and equal rate of profit. The association determined the prices at which commodities would be bought from producers and sold in the market. The association would also control the quality of the commodities to be sold, by organising public inspection, often accompanied by some form of stamp of quality. The Milk Marketing Board, established in the UK, would be a more modern equivalent.

In order to ensure these equal profits, the associations imposed strict control over these buying and selling prices.

“Woe to the man who sold under the price or bought above the price! The boycott that struck him meant at that time inevitable ruin, not counting the direct penalties imposed by the association upon the guilty.”

(Capital III, p 901)

If we take into consideration the time, and nature of the business, which usually includes transporting commodities over considerable distances, requiring long durations, it is quite clearly a risky business. Not only are the merchants subject to robbery by common criminals, but on the high seas they are subject to piracy from state sponsored privateers.

“This original rate of profit was necessarily very high. The business was very risky, not only because of wide-spread piracy; the competing nations also permitted themselves all sorts of acts of violence when the opportunity arose; finally, sales and marketing conditions were based upon licences granted by foreign prices, which were broken or revoked often enough. Hence, the profit had to include a high insurance premium. The turnover was slow, the handling of transactions protracted, and in the best periods — which, admittedly, were seldom of long duration — the business was a monopoly trade with monopoly profit. The very high interest rates prevailing at the time, which always had to be lower on the whole than the percentage of usual commercial profit, also prove that the rate of profit was on the average very high.” (Capital III, p 902)

It was these very high profits that led Martin Luther to set out his objections to the merchants as Marx discussed in Capital.

Although there was an equal rate of profit, for every merchant within each association, different associations, arising in different locations, had different rates of profit, and the process of equalisation of these rates occurred in the opposite direction as a result of competition by each of these associations.

“First, the profit rates of the different markets for one and the same nation. If Alexandria offered more profit for Venetian goods than Cyprus, Constantinople, or Trebizond, the Venetians would start more capital moving towards Alexandria, withdrawing it from trade with other markets. Then, the gradual equalization of profit rates among the different nations, exporting the same or similar goods to the same markets, had to follow, and some of these nations were very often squeezed to the wall and disappeared from the scene. But this process was being continually interrupted by political events, just as all Levantine trade collapsed owing to the Mongolian and Turkish invasions; the great geographic-commercial discoveries after 1492 only accelerated this decline and then made it final.” 

(Capital III, p 902-3)

The improvements in transport and communications that occurred in the 16th and 17th centuries, opened up trade on a much larger scale, into India and North America. The riches that came to merchants allowed them to develop capital, individually on a scale much greater than previously, even the largest corporations such as that in Venice could achieve. These new companies, like the British and Dutch East India Companies, and the Hudson's Bay Company, had state backing, as well as having sufficient capital of their own to back their merchants with private armies. Before India became a part of the British Empire, it was run by the East India Company, and it was the company's private army, under Robert Clive, that made that possible.

“But in the first place, bigger nations stood behind these companies. In trade with America, the whole of great united Spain took the place of the Catalonians trading with the Levant; alongside it, two countries like England and France; and even Holland and Portugal, the smallest, were still at least as large and strong as Venice, the greatest and strongest trading nation of the preceding period. This gave the travelling merchant, the merchant adventurer of the 16th and 17th centuries, a backing that made the company, which protected its companions with arms, also, more and more superfluous, and its expenses an outright burden. Moreover, the wealth in a single hand grew considerably faster, so that single merchants soon could invest as large sums in an enterprise as formerly an entire company. The trading companies, wherever still existent, were usually converted into armed corporations, which conquered and monopolistically exploited whole newly discovered countries under the protection and the sovereignty of the mother country. But the more colonies were founded in the new areas, largely by the state, the more did company trade recede before that of the individual merchant, and the equalization of the profit rate became therewith more and more a matter of competition exclusively.” 

(Capital III, p 903)

Engels points out, however, that even up to this period, this equalisation of the rate of profit is only an equalisation of merchant's profit, because industrial capital had not been developed on a significant scale.

“Production was still predominantly in the hands of workers owning their own means of production, whose work therefore yielded no surplus-value to any capital. If they had to surrender a part of the product to third parties without compensation, it was in the form of tribute to feudal lords. Merchant capital, therefore, could only make its profit, at least at the beginning, out of the foreign buyers of domestic products, or the domestic buyers of foreign products; only toward the end of this period — for Italy, that is, with the decline of Levantine trade — were foreign competition and the difficulty of marketing able to compel the handicraft producers of export commodities to sell the commodity under its value to the exporting merchant. And thus we find here that commodities are sold at their value, on the average, in the domestic retail trade of individual producers with one another, but, for the reasons given, not in international trade as a rule.” (p 904)

That is quite different from the current situation, Engels says, whereby competition, at an international level, creates equalised prices, but local variations occur, between the prices paid by an importer/wholesaler and the prices charged by retailers in different cities, who buy from that same importer/wholesaler.

“The instrument that gradually brought about this revolution in price formation was industrial capital. Rudiments of the latter had been formed as early as the Middle Ages, in three fields — shipping, mining, and textiles.” (p 904)

Shipping, on the scale of the maritime republics, was impossible without sailors who, by definition, had to be wage labourers, though they may also have been paid partly by a profit share. The mines had been converted from guilds into stock companies, that employed wage workers, and merchants had started the “putting-out” system whereby they provided the material to cottage workers, who processed it, and handed back the finished product to the merchant in return for a wage.

The merchants, who became textile producers, had in front of them, the average rate of profit now obtained by merchant capital, as a guide to the kind of average profit they should expect from advancing this capital for production.

“Now, what could induce the merchant to take on the extra business of a contractor? Only one thing: the prospect of greater profit at the same selling price as the others. And he had this prospect. By taking the little master into his service, he broke through the traditional bonds of production within which the producer sold his finished product and nothing else. The merchant capitalist bought the labour-power, which still owned its production instruments but no longer the raw material. By thus guaranteeing the weaver regular employment, he could depress the weaver's wage to such a degree that a part of the labour-time furnished remained unpaid for. The contractor thus became an appropriator of surplus-value over and above his commercial profit.” (p 904-5)

The weavers usually accepted this changed condition initially only as a consequence of debt, which meant they were unable themselves to buy the required raw materials.

In Capital III, Chapter 10. Marx describes how this process creates an average or general rate of industrial profit. The merchant capitalists sought to obtain an equal rate of profit on the capital they advanced, but this equal rate of profit was one that was imposed by the various forms of feudal monopoly. The petty commodity producers were not concerned to make the same rate of profit, but only to be able to sell their commodities at their value. In other words, they only sought to recoup the cost of the means of production, which they had advanced, along with the value added to them by their labour. This meant that an equalised rate of surplus value existed, but this did not result in an equalised rate of profit.

An equalised rate of surplus value arises, because the commodity producer is concerned not to be spending too much of their day occupied in necessary labour. Some products can only be produced in particular countries or regions, others can simply be produced more easily in some places than others. So, for example, different communities and nations engage in trade to obtain silk and spices from the Orient, and send their own commodities along the Silk Road, in exchange. Within particular countries, similar advantages for production exist. For example, the existence of iron ore close to extensive forests, or coal deposits. Over time, particular areas develop human skills for the production of different types of commodity, for example, pottery manufacture in North Staffordshire.

Each commodity producer will, thereby focus their production on those types of product, for which they have some advantage in production, so that they spend the minimum amount of time engaged upon it, for the output they produce.

“Such a general rate of surplus-value — viewed as a tendency, like all other economic laws — has been assumed by us for the sake of theoretical simplification. But in reality it is an actual premise of the capitalist mode of production, although it is more or less obstructed by practical frictions causing more or less considerable local differences, such as the settlement laws for farm-labourers in Britain. But in theory it is assumed that the laws of capitalist production operate in their pure form. In reality there exists only approximation; but, this approximation is the greater, the more developed the capitalist mode of production and the less it is adulterated and amalgamated with survivals of former economic conditions.”

(Capital III, Chapter 10) 

The fact that an average rate of surplus value exists, however, does not mean that an average rate of profit exists. In fact, as Marx points out, quite the contrary, this equal rate of surplus value means that different rates of profit must exist, because the rate of profit is a measure of the surplus value, not just against the variable capital, but against the total capital advanced, and different types of production will employ different amounts and values of constant capital, relative to the variable capital. In other words, they will have a different organic composition of capital.

A capital that employs a large mass of material relative to the labour that processes it, or which employs high value material relative to the labour that processes it, will advance a greater quantity of capital in relation to the surplus value produced than will another capital of the same size, which employs only a small amount of material, or lower value material, relative to the labour that processes it. For example,

c 800 + v 200 + s 200. s' = 100%, r' = 20%

c 200 + v 800 + s 800. s' = 100%, r' = 80%.

Given that in every sphere of production, these different organic compositions of capital exist, and that this composition is continually changing, and new spheres of production are continually developing, this condition of different rates of profit, in each sphere, is the starting point, and normal condition. Yet, capital, by its nature, will always seek to obtain the highest rate of profit, and so will always tend to shy away from those areas where the rate of profit is lowest, and flock towards those areas where the rate of profit is highest. It is this process which leads to the development of an average or general rate of industrial profit, not as ever an established fact, but only as a tendency.

The means by which this average is obtained is via competition. In those spheres where the rate of profit is low, capital will accumulate more slowly, or will be withdrawn. As the supply of commodities in this sphere, thereby falls, so the market-price of these commodities will rise, above their exchange-value. The profit (p) obtained is the difference between the cost-price (c + v) and the market-price. As the market price, thereby rises, so the profit rises. Similarly, in those spheres where the rate of profit is high, capital will accumulate more rapidly, and will be attracted from elsewhere. As this increased amount of capital increases the supply of commodities, in that sphere, so their market prices will fall, below their exchange value. As the market price falls, so the profit obtained falls. If all capitals were invested in spheres whereby they could not obtain a higher rate of profit by moving to some other sphere, then there could only be a single average, or general rate of profit, which each was receiving.

On this basis, the price of production of each type of commodity is established. The price of production is then the cost price (c + v) plus the average rate of profit on the advanced capital (p). Its important to make this point that p here is the average rate of profit on the advanced capital C, and not on the laid-out capital, or cost of production (c + v), or k. Marx makes this distinction clear, in Capital III, Chapter 9.

“Take, for example, a capital of 500, of which 100 is fixed capital, and let 10% of this wear out during one turnover of the circulating capital of 400. Let the average profit for the period of turnover be 10%. In that case the cost-price of the product created during this turnover will be 10 c for wear plus 400 (c + v) circulating capital = 410, and its price of production will be 410 cost-price plus (10% profit on 500) 50 = 460.”

This is clearly different than a price of production calculated as k + kp', which would be, 410 + (410 x 10%) = 41, giving a price of production of 451. I have described this in more detail elsewhere

The average rate of profit has to be calculated on the advanced capital, rather than on the laid-out capital (c + v), or cost of production (k), because different capitals not only have different organic compositions, but also different rates of turnover. A capital employed in shipbuilding, for example, where the output is not finished for a long time, so that the capital remains tied up for long periods, will make a lower real rate of profit, if the average is calculated on its laid out capital rather than on the advanced capital. In just the same way that capitals with a lower than average organic composition of capital make a higher than average rate of profit, so capitals that turn over more quickly than the average will make a higher than average annual rate of profit, s/C than those that turn over at a slower rate than the average. Conversely, those capitals that have a higher than average rate of turnover of capital will have a lower than average rate of profit, p/k, than those which turn over more slowly than the average. 

These differences between the rates of turnover of capital in different spheres of production are effaced in the rate of profit on the total social capital, precisely because it is the average of the annual rates of profit, made in each sphere, which already takes into account the rate of turnover. But, the same principle applies when comparing different national capitals, or changes in the social capital over time. A country whose capital is employed in spheres of production, where the rate of turnover is higher than the international average, will obtain a higher annual rate of profit, and operate with lower rates of profit, and profit margins than a country whose capital is employed in types of production, where the capital turns over more slowly. Similarly, a country which undergoes a rapid rise in its social productivity, and thereby raises the rate of turnover of its capital, will see its general annual rate of profit rise, even as it may see its rate of profit, p/k, or profit margin decline. 

The latter phenomenon is merely the inevitable consequence of the rise in the rate of turnover so that a given amount of advanced capital, in turning over more times, leads to an increase in the quantity of laid out capital, relative to the advanced capital. It means that a given amount of profit, is spread over a much larger volume of output.

In determining, the general annual rate of profit, Marx sets out in Capital III, Chapter 17, that it also includes the value of the advanced Merchant Capital. This Merchant Capital, which includes the money-dealing, as opposed to money-lending capital, is merely the independent form of the commodity-capital, and money-capital phases of the circuit of industrial capital. If Merchant Capital did not advance this capital, it would have to be advanced by productive-capital, and thereby form the basis upon which its general annual rate of profit was calculated. The reason why Merchant Capital arises, is precisely because it reduces the amount of capital that society must advance for this purpose, and also raises the rate of turnover of the total social capital, which thereby brings about an overall rise in the general annual rate of profit.

However, as Marx and Engels now describe, with the dominance of industrial capital, it is the general annual rate of profit, which it establishes which acts as the regulator, and not the merchant capital, as was the case prior to the development of industrial capital. The Merchant Capital can only share, as capital, in the surplus value created by productive-capital. It can only continue to exist as independent capitals so long as it performs the function as set out above, of reducing the circulation costs of productive-capital, and thereby raising the general annual rate of profit.

If too much capital becomes employed in that function, then the rate of profit obtained by merchant capital will fall below the average, and some will move out, to become engaged in production once more, and vice versa.

“Commercial capital, therefore — stripped of all heterogeneous functions, such as storing, expressing, transporting, distributing, retailing, which may be connected with it, and confined to its true function of buying in order to sell — creates neither value nor surplus-value, but acts as middleman in their realisation and thereby simultaneously in the actual exchange of commodities, i.e., in their transfer from hand to hand, in the social metabolism. Nevertheless, since the circulation phase of industrial capital is just as much a phase of the reproduction process as production is, the capital operating independently in the process of circulation must yield the average annual profit just as well as capital operating in the various branches of production. Should merchant's capital yield a higher percentage of average profit than industrial capital, then a portion of the latter would transform itself into merchant's capital. Should it yield a lower average profit, then the converse would result. A portion of the merchant's capital would then be transformed into industrial capital. No species of capital changes its purpose, or function, with greater ease than merchant's capital.”

(Capital III, Chapter 17)

Capital III, Chapter 25 - Part 7

Marx then quotes from the Guardian of November 24th 1847, to illustrate how credit was obtained on the basis simply of consignments.

“Mr. A in London instructs a Mr. B to buy from the manufacturer C in Manchester commodities for shipment to a Mr. D in East India. B pays C in six months' drafts to be made out by C on B. B secures himself by six months' drafts on A. As soon as the goods are shipped A makes out six months' drafts on D against the mailed bill of lading. 

"The shipper and the co-signee were thus both put in possession of funds — months before they actually paid for the goods; and, very commonly, these bills were renewed at maturity, on pretence of affording time for the returns in a 'long trade'.”” (p 409) 

Moreover, the more this increased the debt of the manufacturers that needed to be repaid, the more this led them to send out further, essentially bogus, consignments solely to obtain money loaned against them, in order to cover their latest debt to fall due.

And, it was not just in Britain that these swindles were conducted. Likewise, in India and China, goods were purchased to be sent to England, and on the basis of these shipments loans were raised.

““Houses in India, who had credit to pass their bills, were purchasers of sugar, indigo, silk, or cotton — not because the prices advised from London by the last overland mail promised a profit on the prices current in India, but because former drafts upon the London house would soon fall due, and must be provided for. What was so simple as to purchase a cargo of sugar, pay for it in bills upon the London house at ten months' date, transmit the shipping documents by the overland mail; and, in less than two months, the goods on the high seas, or perhaps not yet passed the mouth of the Hoogly, were pawned in Lombard Street — putting the London house in funds eight months before the drafts against those goods fell due. And all this went on without interruption or difficulty, as long as bill-brokers had abundance of money 'at call,'; to advance on bills of lading and dock warrants, and to discount, without limit, the bills of India houses drawn upon the eminent firms in Mincing Lane."” (p 409)

Engels points out that the basis of this fraud was essentially ended when the goods began to be shipped by steam boat via the Suez Canal, thereby slashing the circulation time of the capital.

The extent of the contraction in the money supply was illustrated in the Report on Commercial Distress, 1847-8, quoted by Marx. In April 1847, the Bank of England announced that it would reduce its discount business with the Royal Bank of Liverpool by half. As one of the main trading centres of the time, banks in Liverpool continually received large inflows and outflows. The various merchants and export houses usually paid cash into the bank, but as the quantity of money in the economy began to contract, a larger proportion of their payments took the form of bills of exchange. The bank, in turn, would have to pay the bills accrued by the merchants for their purchases, often from abroad. In order to make these payments, the banks in Liverpool needed to obtain cash or Bank of England notes, by discounting their own bills with it. The announcement of the Bank of England's reduction in its discounting activity meant that these banks would have less money to be able to make such payments.

““The announcement operated with peculiar hardship on this account, that the payments into Liverpool had latterly been much more in bills than in cash; and the merchants who generally brought to the Bank a large proportion of cash with which to pay their acceptances, had latterly been able to bring only bills which they had received for their cotton and other produce, and that Increased very rapidly as the difficulties increased.... The acceptances ... which the Bank had to pay for the merchants, were acceptances drawn chiefly upon them from abroad, and they have been accustomed to meet those acceptances by whatever payment they received for their produce.... The bills that the merchants brought... in lieu of cash, which they usually brought ... were of various dates, and of various descriptions; a considerable number of them were bankers' bills, of three months' date, the large bulk being cotton bills. These bills of exchange, when bankers' bills, were accepted by London bankers, and by merchants in every trade that we could mention — the Brazilian, the American, the Canadian, the West Indian.... The merchants did not draw upon each other; but the parties in the interior, who had purchased produce from the merchants, remitted to the merchants bills on London bankers, or bills on various parties in London, or bills upon anybody. The announcement of the Bank of England caused a reduction of the maturity terms of bills drawn against sales of foreign products, frequently extending to over three months".” (p 410)

But, this contraction in money supply also occurred at a time when the demand for money was high. The prosperity from 1844-47, coincided with the Railway Mania. Although the large surplus profits meant that the initial payments for stock could be made in cash, as was seen earlier, many businesses were also starved of cash to provide funds for the speculation. Firms then had to borrow to cover their need for working capital. But the swindles also led to further large scale borrowing to cover the further calls for railway shares, as they fell due.

“In April 1847 "almost all mercantile houses had begun to starve their business more or less ... by taking part of their commercial capital for railways" (p.42). "Loans were made on railway shares at a high rate of interest, say, 8%, by private individuals, by bankers and by fire-offices" (p. 66). "Loans to so great an extent by commercial houses to railways induced them to lean too much upon banks by the discount of paper, whereby to carry on their commercial operations"” (p 410)

In April, money to cover these calls had flowed into the banks coffers, which increased their available funds. But, by October, that had changed.

“"In the summer that melted gradually away, and on the 31st of December it was materially less. One cause ... of the pressure in October was the gradual diminution of the railway money in the bankers' hands; between the 22nd of April and the 31st of December the railway balances in our hands were reduced one- third; and the railway calls have also had this effect throughout the Kingdom; they have been gradually draining the deposits of bankers"” (p 410)

Back To Part 6

Forward To Part 8

Tuesday, 2 February 2016

Capital III, Chapter 25 - Part 6

The cause of the financial crash that necessarily flowed from the speculative bubble, was the crop failure of 1846, whose most notable feature was the Irish famine. But, both Ireland, that acted as Britain's bread basket, and the rest of Britain, had to import large amounts of food from the continent, to make up the difference. Britain was already the workshop of the world, and supplying large quantities of manufactured goods to Europe. So, its capacity to pay for this imported food with additional exports, was limited. That should have posed no real problem. As seen earlier, Britain had a large trade surplus, its coffers were stuffed full of gold, earned in the previous years from its exports. And, indeed, it paid for this imported food by shipping some of this gold in payment. However, the 1844 Bank Act required that the country's money supply be determined not by the requirements of the commodities to be circulated, but by the quantity of gold in its reserves. The large outflow of gold, therefore, required that the money supply be contracted, just at the very time when more money was required in circulation.

“Gold worth at least nine million was sent abroad. Of this amount no less than seven and a half million came from the treasury of the Bank of England, whose freedom of action on the money-market was thereby considerably impaired. Other banks, whose reserves were deposited with the Bank of England and were practically identical with those of that Bank, were thus also compelled to curtail accommodation of money. The rapid and easy flow of payments was obstructed, first here and there, then generally. The banking discount rate, still 3 to 3½% in January 1847, rose to 7% in April, when the first panic broke out. The situation eased somewhat in the summer (6½%, 6%), but when the new crop failed as well panic broke out afresh and even more violently. The official minimum bank discount rose in October to 7 and in November to 10%; i.e., the overwhelming mass of bills of exchange was discountable only at outrageous rates of interest, or no longer discountable at all. The general cessation of payments caused the failure of several leading and very many medium-sized and small firms. The Bank itself was in danger due to the limitations imposed by the artful Bank Act of 1844. The government yielded to the general clamour and suspended the Bank Act on October 25, thereby eliminating the absurd legal fetters imposed on the Bank. Now it could throw its supply of bank-notes into circulation without hindrance. The credit of these bank-notes being in practice guaranteed by the credit of the nation, and thus unimpaired, the money stringency was thus instantly and decisively relieved. Naturally, quite a number of hopelessly enmeshed large and small firms failed nevertheless, but the peak of the crisis was overcome, the banking discount dropped to 5% in December, and in the course of 1848 a new wave of business activity began which took the edge off the revolutionary movements on the continent in 1849, and which inaugurated in the fifties an unprecedented industrial prosperity, but then ended again — in the crash of 1857.” (p 408)

This is remarkably similar to the financial crash of 2008, and its aftermath. In fact, the 1847 crash had a much larger impact on the real economy. According to Marx, that financial crisis caused economic activity to contract by 37%! It also had a dramatic impact on the fictitious capital that had been built up. He quotes a House of Lords document that shows the fall in the value of stocks and bonds.

“According to it the depreciation of October 23, 1847, compared with the level in February of the same year, amounted to:
On English government bonds
On dock and canal stock
On railway stock

(Capital III, p 408-9)