Sunday, 25 January 2015

Ils Sont Tout Saud

Only a week or so ago they proclaimed - "Je Suis Charlie" - in a faked photo opportunity in Paris, to have us all believe that, despite all of the actions in their own states to limit liberty, they stood shoulder to shoulder to defend bourgeois freedoms with those who had actually given their lives in that endeavour.  Today, those same world leaders, have shown their true nature.  In reality, ils sont tout Saud - they are all the House of Saud, the funeral for whose Godfather they were happy to attend, and of whom they were prepared to lavish all kinds of obsequious praise.

This is a feudal regime, like the others in the Gulf, whose very existence should be anathema to those principles of "Liberte, Egalite, Fraternite", which the bourgeois revolution was fought under.  It was against such feudal regimes that those principles were formulated as their war cry by the revolutionary bourgeoisie.  But, as I set out recently, not only does the liberal bourgeoisie fail to argue for progress under the flag of those principles, but it is not prepared even to consistently defend those principles against reactionary opponents.

Oil Prices. Good For The Economy, Terrible For Financial Markets - Part 7

So far, I have explained why the fall in oil prices is terrible for financial markets, because firstly it exposes considerable amounts of energy debt, in the junk bond market, to the possibility of default that may spread into the wider credit markets, and secondly, it means that large amounts of rent previously accrued from surplus profits, made from primary production, disappear, whilst the same factors cause states to have to go into the money markets as borrowers, which previously were lenders, and which thereby causes global interest rates to rise, at a time when those rates are rising anyway, and when there is considerable volatility in currency and credit markets. I have also given a brief outline of the way the fall in oil prices may be beneficial to the economies of those states that are dependent on oil consumption, and detrimental to those that have been dependent upon oil production. I now turn to a more detailed examination of why lower oil and other primary product prices is beneficial to capital in general.

In Capital III, Chapter 47, Marx writes,

“The physiocrats, furthermore, are correct in stating that in fact all production of surplus-value, and thus all development of capital, has for its natural basis the productiveness of agricultural labour. If man were not capable of producing in one working-day more means of subsistence, which signifies in the strictest sense more agricultural products than every labourer needs for his own reproduction, if the daily expenditure of his entire labour power sufficed merely to produce the means of subsistence indispensable for his own individual requirements, then one could not speak at all either of surplus-product or surplus-value. An agricultural labour productivity exceeding the individual requirements of the labourer is the basis of all societies, and is above all the basis of capitalist production, which disengages a constantly increasing portion of society from the production of basic foodstuffs and transforms them into "free heads," as Steuart [Steuart, An Inquiry Into the Principles of Political Economy, Vol. I, Dublin, 1770, p. 396. — Ed.] has it, making them available for exploitation in other spheres.”

In other words, the point that Marx is making here is that in every society, whatever the mode of production, the Law of Value dictates that in order for available social labour-time to be devoted to the production of additional types of use value, the labour-time required to produce the existing use values, required for the consumption of the producers, must fall. The mistake the Physiocrats made, as Marx details later, is that they failed to take into account, given the time they were writing, that not all of these use values required for consumption by the producers, are agricultural products, or other products extracted from the ground. 

“In natural economy proper, when no part of the agricultural product, or but a very insignificant portion, enters into the process of circulation, and then only a relatively small portion of that part of the product which represents the landlord’s revenue, as, e.g., in many Roman latifundia, or upon the villas of Charlemagne, or more or less during the entire Middle Ages (see Vinçard, Histoire du travail), the product and surplus-product of the large estates consists by no means purely of products of agricultural labour. It encompasses equally well the products of industrial labour. Domestic handicrafts and manufacturing labour as secondary occupations of agriculture, which forms the basis, are the prerequisite of that mode of production upon which natural economy rests — in European antiquity and the Middle Ages as well as in the present-day Indian community, in which the traditional organisation has not yet been destroyed. The capitalist mode of production completely abolishes this relationship; a process which may be studied on a large scale particularly in England during the last third of the 18th century.”

(ibid)

On this basis, it can be seen why a fall in the price of any primary product, such as oil, which is ultimately a reflection of precisely this fact, that productivity has risen, the amount of social labour-time required for production has fallen, forms the basis both for the production of additional ranges of use values, and for a fundamental rise in real wages, which is the other side of this increase in physical production. The reduction in the social labour-time required to produce the society's consumption fund, the physical products required by the producers for their reproduction, releases social labour-time – it thereby creates additional surplus labour-time. As Marx sets out,

“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.”

(ibid)

Under capitalism, this form is the extraction of surplus value, as the workers produce a greater quantity of new value, than is represented by the value of their own labour-power. In other words, the worker may work for 8 hours per day, and thereby creates 8 hours of new value, as a consequence of their labour, but the value of their labour-power, the commodity they sell to capital, may only be 4 hours. That is it requires only 4 hours of labour to produce the commodities required for its own reproduction. Of the 8 hours of new value the worker produces, only 4 is required to reproduce their labour-power, and flows back to them in the form of wage goods, which they buy with the wages paid to them. That leaves, commodities with a value of 4 hours in the hands of capital, for which it has paid nothing – a surplus value.

But, its clear that this surplus value can rise by two different means. Firstly, the working-day might be lengthened, and so the portion of absolute surplus value is increased. Secondly, the working-day may remain of the same length, but the portion of it required to produce the commodities required for the reproduction of labour-power may fall, as in the examples above. A fall in the price of oil, or other primary products, thereby reduces the value of labour-power, and increases the proportion of surplus value. It raises the rate of surplus value. This increase in the rate of surplus value, acts to increase the rate of profit, which induces additional investment. But, it also increases the mass of surplus value, thereby raising the potential for additional investment, either in existing products, or in an expansion of capital into the development of new industries.

This is the first means by which a fall in oil prices acts to stimulate economies. In Part 8, I will examine, other means by which the fall in the price of oil acts to raise the rate and mass of profit, and to stimulate economic activity.

Saturday, 24 January 2015

Labour's Immigration Policy Is A Mess - Part 5

The attitude of Blair's government between 1997 and 2010 is symptomatic of this bureaucratic, statist approach of social democracy, described in Part 4. Blair's government faced a similar problem, after 1999 in particular, as Tory Governments had faced in the 1950's.

Just as a new long wave boom began after 1949, so a new boom began after 1999. After 1949, that boom in Britain, particularly after large numbers of working age men had died during the War, faced labour-power shortages that were met in a number of ways. Married women were encouraged into the workforce. The newly created Welfare State, began to provide nurseries and childcare, so that a new generation of workers could be born, whilst their mothers were relieved of some of the requirements of child rearing, that would have prevented them selling their labour-power to capital. The Welfare State, also provided healthcare on a mass produced, Fordist basis, which ensured more workers lived longer, and were patched up so as to be able to keep supplying their labour-power to capital on a more sustainable basis. It also provided education and training to workers, so as to ensure that capital had a supply of the kinds of labour-power it required in a changed, more technological society. By increasing the proportion of complex labour to simple labour, that meant that a given number of workers, thereby provided a greater quantity of abstract labour.

But, even all this, and the further releasing of reserves of domestic labour, by the introduction of a range of labour-saving domestic appliances, was not enough. As workers found themselves in a better bargaining position so as to demand higher wages, and to reject the lower status jobs, especially as better education meant they were now able to apply for the expanding range of higher value, white collar, administrative, technical and managerial jobs, so capital was led to look to fill the large numbers of unskilled jobs, by encouraging immigration.  

A frequent refrain from those who want to claim that their opposition to immigration is not racist, is that “its not about the numbers” coming in, but only about any policy being one that ensures controlled borders. In other words, they are claiming that there is no particular limit, in their mind, of how many workers should be allowed to migrate into the country, other than, whatever the number, it should be based primarily on the interests of British capital, its requirement for particular types of labour, in particular quantities. Its on this basis that Labour, for example, attacks the caps on immigration, proposed by the Tories.

But, in the 1950's, the numbers coming in were geared to this end, and the numbers were not that great. Moreover, the other aspect of the “its not about the numbers” excuse didn't apply either. That is that the infrastructure of availability of houses, schools, hospitals etc. should be able to cope with any increase. During this period, all of these things were being provided in increased quantities, and indeed, then as now, many of the immigrants were required to provide them. Yet, just as happened at the start of the century, when the Aliens Bill was introduced, it is clear that the opposition to the immigration was racist, and the argument about numbers was simply a cover. When the level of immigration was still very low, when wages were rising due to a shortage of labour-power, when the post-war boom was creating significant numbers of additional housing, including council housing, and a rapidly expanding welfare state, the signs in rented housing stating “No Blacks, No Irish, No Dogs” were still common.

When we hear today arguments about opposition to immigration not being racist, the same thing applies. Labour has been happy to accept the notion that this is the basis of opposition by many potential voters, because it is easier to do so, and address the conclusion to that, by pandering to it in the form of some form of humane, anti-racist immigration policy, than to deal with the truth.

We are repeatedly told that Britain is an harmonious, tolerant society, where racist and bigoted views are held by only a tiny minority. It is the same kind of liberal cowardice to tackle unpleasant truths that leads to the argument that religion is peaceful and so on, and which, thereby again tries to present religious violence and intolerance as only being the actions of an aberrant minority of extremists. This myth is also perpetuated by many sections of the left too, who mostly being middle class students, or former middle class students now ensconced in middle class jobs, are afraid to allow themselves anything other than a rose tinted view of the real working-class, a view which their separation from that real working-class allows them to continue to hold. It allows them to continue to believe that the only thing holding back socialism, is the continual betrayal and misleadership of those workers by the TU and Labour bureaucrats. 

Yet, anyone who lives in the real world knows this is far from the truth. The unpleasant reality is that apart from specific, usually short-lived periods, the TU and Labour leaders are generally ahead of the mass of workers in terms of their class consciousness. Around 30% of workers hold views that are essentially racist. They are not hardened racists of the type of the BNP, but they are views that are racist in the sense described above, that even were there no problems with jobs, housing and so on, they would still see immigration as a problem. In fact, its often in areas where there is least immigration where opposition is greatest. It is reflected in the fact that so many are prepared to accept as fact, lies that are quite clearly preposterous for anyone with a brain. For example, you do not have to go far, or hear many vox pop interviews, to hear the same “facts” trotted out about immigrants not only being given free luxury houses, but being given free cars, being allowed to drive without passing their test and other such nonsense.

Yet nothing is done to address those ideas, that are also widely disseminated by the gutter press such as the Express and Mail, because to do so, in an adequate manner, would not just mean admitting that these ideas are widely held amongst sections of the working-class, but would, more significantly, involve taking on the power of that section of the press, and the conservative social forces upon which it rests. The reason that Labour's immigration policy is a mess, is the same reason that Social Democracy's position in dealing with all other manifestations of conservatism is a mess, that is its timidity in waging an all out war against the attempts of that conservatism to impede the further development of modern, industrial capitalism, and where possible even to roll that development back. It is seen in the cringing, cowardly position of social-democracy in relation to a defence of basic bourgeois freedoms such as the right to free speech, when under attack by religious zealots.

Northern Soul Classics - You Don't Want Me No More - Major Lance

An all time monster from Mr. Northern Soul, Major Lance, himself.  It takes you back to that wonderful night back in December 1972, when he recorded the "Live at the Torch" album.  Roll back the carpets.

Friday, 23 January 2015

Capital II, Chapter 20 - Part 46

Marx then looks at the consequences of such a disproportion from both angles, where the depreciation fund is less than the amount of fixed capital actually replaced, and where it is higher.

In the first case, Marx sets out, Department 1 has £200 of fixed capital, 1(s) to exchange. Department 2(i) has £220 in money to buy the required fixed capital, and Department 2(ii) has £200 of commodity-capital, equal to the depreciation fund.

So, 2(i) advances £200 to buy the fixed capital. Department 1(s) spends the £200 buying consumer goods from 2(ii). That leaves £20 in the hands of 2(i) that cannot be converted into means of production. This problem cannot be resolved by setting the remainder of Department 1(s) at £220 rather than £200. If that were the case, 2(i) would spend £220 buying constant capital from 1(s). Department 1(s) would then have £220 to spend, but Department 2(ii) only has £200 of commodity-capital to sell to them. Department 1(s) is then left with £20, meaning £20 of surplus value it cannot realise.

In the second case, Department 1 has £200 in commodities to exchange, Department 2(i) has £180 in money, and 2(ii) has £200 in commodities, equal to the depreciation fund.

Department 2(i) buys £180 of constant capital from Department 1(s). Department 1(s) buys £180 of consumer goods from Department 2(ii). But, that leaves £20 of unsaleable constant capital, in the hands of Department 1(s), and £20 of consumer goods unsaleable in the hands of Department 2(ii), because neither now have available money-capital to advance that would facilitate the exchange.

As with the first case, it would not help to make Department 1(s) £180.

“True, no surplus would then be left in 1, but now as before a surplus of 20 would remain in II c (section 2), unsaleable, inconvertible into money.” (p 470)

What is the solution to this problem?

“If II c (1) is greater than II c (2), foreign commodities must be imported to realise the money-surplus in Is. If, conversely, II c (1) is smaller than II c (2), commodities II (articles of consumption) will have to be exported to realise the depreciation part of II c in means of production. Consequently in either case foreign trade is necessary. 

Even granted that for a study of reproduction on an unchanging scale it is to be supposed that the productivity of all lines of industry, hence also the proportional value-relations of their commodities, remain constant, the two last-named cases, in which II c (1) is either greater or smaller than II c (2), will nevertheless always be of interest for production on an enlarged scale where these cases may infallibly be encountered.” (p 470-1)

In other words, given the basic assumption of capitalism as a system based on capital as self-expanding value, and given this means that reproduction will occur on an extended scale, such disproportions are an inherent feature of the system, and must then lead to crises of overproduction of capital.

“This illustration of fixed capital, on the basis of an unchanged scale of reproduction, is striking. A disproportion of the production of fixed and circulating capital is one of the favourite arguments of the economists in explaining crises. That such a disproportion can and must arise even when the fixed capital is merely preserved, that it can and must do so on the assumption of ideal normal production on the basis of simple reproduction of the already functioning social capital is something new to them.” (p 473)

A short term fix may be achieved, as Marx says above, via foreign trade, but this offers no real solution. As Marx also says,

“Foreign trade could help out in either case: in the first case in order to convert commodities I held in the form of money into articles of consumption, and in the second case to dispose of the commodity surplus. But since foreign trade does not merely replace certain elements (also with regard to value), it only transfers the contradictions to a wider sphere and gives them greater latitude.” (p 472-3)

Thursday, 22 January 2015

ECB, LTRO, OMT, QE – EU, FUBAR

The ECB today, as expected, has engaged in a policy of open QE.  It is to buy €60bn of government bonds, every month, at least until September 2016, and with an open ended commitment to keep buying until the inflation path signals that it is back on course to meet the its target of 2% p.a. The ECB has, until now, engaged in only covert QE, via its policies of Long Term Refinancing Operations to banks, and Open Market Transactions. The initial consequence of the announcement was to cause the Euro to drop by around 1% against both sterling and the dollar.

This immediate effect of a falling value of the Euro, is probably the only real beneficial effect that Eurozone economies will experience from the move.  Bond yields in Europe, as elsewhere, are at several century lows. The cause of those low global interest rates is the huge rise in global rates and masses of profits over the last 30 years, which has led to a huge surplus of supply of loanable money-capital over its demand. Even if printing more money tokens were a means of reducing these interest rates – and it isn't, because as Marx sets out, it is only a means of devaluing the money tokens themselves – it is impossible to see how reducing interest rates, even further, from levels they have not been at since the time of the Black Death, would have any significant effect on stimulating economic activity!

A falling value of the Euro, does have some beneficial economic effects for Eurozone economies, because it makes the price of commodities, produced within the zone, cheaper, when priced in Sterling, Dollars, Swiss Francs, Danish Krona and so on. That means its easier to sell those commodities on the global market. However, the majority of commodities, produced by those countries, within the Eurozone, experiencing problems, are not sold on the global market, but sold to other Eurozone economies, such as Germany. Germany, as a major producer of high value commodities, and the world's second largest exporter, after China, benefits greatly from a reduction in the value of the Euro, because it means that its exports of Mercedes, Porsches and so on, become much more competitive.

But, for countries like Greece and Spain, or Italy, or Portugal, that rely on selling lots of lower value commodities, such as agricultural produce, to Germany, in exchange for these higher value commodities, there is no such benefit, because they are selling goods priced in Euros to Germany, which supplies them with these other commodities equally priced in Euros. Where Germany benefits from having lower priced commodities sold into the world market, as a result of a lower valued Euro, the peripheral economies have no such advantage in selling to Germany, or other northern Eurozone economies. The only way their commodities can become cheaper, in Euro terms, to sell into these northern Eurozone economies, is if their Euro denominated price falls. In other words, if they cut costs further, which means reducing the wages paid to workers in Spain, Portugal, Greece and so on, and indeed reducing the profits of capital in those economies further. It requires, further deflation in those economies, and a transfer of value to Germany and other northern European economies. It requires that an hour of labour-time expended in the periphery becomes worth even less than it currently is, compared to an hour of labour-time expended in Germany.

This has been seen in the past. Britain and other Colonial Empires pulled off this trick in transferring value from their colonies to the home country; the northern industrial states of the US pulled it off, after the Civil War, in relation to the southern Confederate states, and as Lenin points out, Russia pulled it off in relation to Siberia, and other outlying areas, in its own development during the late 19th Century. It is the kind of economic policy you would expect of a colonial power, not the kind of economic policy you would expect from a proto state that claims to be working towards a common market, and closer monetary and fiscal integration, with the concomitant sharing of risks and burdens.

And, the other aspect of the ECB decision demonstrates this further. It had been widely rumoured that the ECB would abandon the idea of risk sharing that is fundamental to such a monetary union, in the process of money printing, and the buying of sovereign bond buying. The reason for that is that the central bank has no resources of its own. Ultimately, the central bank only has resources to the extent that a sovereign state stands behind it, with fiscal powers to raise taxes, and cover any losses made by the central bank in such operation. In other words, under such conditions, monetary policy necessarily flows over into fiscal policy. If the central bank loses money, the state must levy taxes to raise the funds required to cover those losses. This is clearly a problem for the EU, where no such single state exists. In reality, the only state that exists with the power and credibility to perform this function, is the German state, which understandably is reluctant to accept that role, without control over the spending and borrowing.

Had the ECB gone for the idea that was touted that any bond buying would have to be done by, or covered by, the central bank of the country whose bonds were bought, that would effectively have spelled the end of the Eurozone itself. In the end, the ECB went only 80% in that direction. The central banks of each country are to stand behind the buying of bonds in their particular country, whilst 20% of the bond buying will be done on the basis of risk sharing by all Eurozone banks. That in itself assumes that these banks are able to cover this risk.

According to the ECB and others, the Eurozone banks are now in such a position, but anyone who has witnessed the repeated sham bank stress tests must seriously doubt the veracity of that claim. Time and again, we have been told that the banks were safe only to find, a few months later, those very same banks were bankrupt, and requiring bail-outs. In fact, nothing fundamental has changed to alter the solvency of the banks, and its for that reason that the ECB needs to undertake QE now.

The first examples of QE, undertaken in the US, were used precisely to print money to cover the huge debts of the banks and financial institutions which erupted in the financial crisis that began with the collapse of Lehman's in September 2008, and which I had predicted was about to happen several weeks earlier, at the start of July. What that amounted to, as I had written about for some time previous to that, was a policy of Socialism for the Rich, whereby the bankrupt assets of the rich were bought up at inflated prices by the state, and which workers thereby had to pay for in higher taxes.

When property prices fell by 20% in 2008/9 in Britain, as a result of the financial crisis, the British state undertook a similar policy, and in 2010, the state in Ireland, Spain, and elsewhere in the Eurozone, undertook the same course of action. The Irish state effectively bankrupted itself, buying up the worthless assets of the Irish banks, that rested upon masses of worthless Irish properties. The ECB policy, since 2010, has been a continuation of that policy. It has been a policy of continuous extend and pretend, whereby the owners – be they private owners or banks - of worthless European properties, in Spain, Portugal, Italy and so on, across Europe, have been able to continue to pretend that they still have some value, only because the banks have been able to avoid foreclosing on private borrowers, whilst millions of properties that have been repossessed, and sit on the books of the banks, continue to be shown at massively inflated values relative to their actual valuation, only because the banks themselves have been able to borrow at near zero rates, from the ECB, so as to avoid having to sell those properties themselves, at firesale prices.

Huge amounts of money has gone simply into keeping these fictitiouscapital values inflated, at the expense of investment in building real productive-capital, a process that has itself been frustrated by the maintenance of these massively inflated prices for fictitious capital, that has encouraged financial speculation at the expense of productive investment. The ECB's action, today, merely represents a further extension of that policy, to protect the fictitious capital of the super rich, and of the banks themselves, at the expense of building real productive-capital; at the expense both of industrial capital, and of workers who will ultimately foot the tax bill for this huge waste of financial resources.

A visitor from Mars would think that the people of Earth were truly mad to be trying to protect the fictitious valuation of paper assets such as shares, bonds, and mortgages, by cutting back investment in real wealth producing assets, such as economic infrastructure, education and so on, at a time when the interest rate, the cost of such investment was near zero! But, that is the cost that the owners of the fictitious capital demand.

For 6 years now, central banks have reduced official interest rates, to protect the nominal paper values of those fictitious assets. Not one additional machine, or piece of productive-capital can be shown to have arisen from it. The only place where real productive-investment and a growth of the economy can be shown to have arisen, where such policies have been undertaken, is in the US. But, there the real reason for that investment and growth lies not with the QE, but with the fiscal stimulus provided by the state to finance such investment. Whenever, the US state's policy of fiscal expansion was put under threat, by the Tea Party and Republicans, that additional investment and economic growth itself was reduced, as happened over the various crises around the Debt Ceiling, the Budget, and the Sequester.

Such growth was also seen in the UK and the EU, when such fiscal stimulus was undertaken prior to 2010.  But, similarly, after 2010, when conservative governments introduced austerity, it collapsed. However, much the British Liberal-Tories crow today, the fact is that the UK economy still has not recovered even the potential growth it lost due to their austerity policies since 2010, let alone the growth lost as a result of the 2008/9 financial crisis.

The ECB policy of QE will have no more success, without the kind of co-ordinated EU wide fiscal stimulus that has been undertaken in the US, and the fact that even Eurozone wide risk sharing of the QE has now been reduced to just 20%, says that is not likely to happen, in the near future, unless a new crisis forces it upon EU leaders. The only effect of today's announcement will be to assist German exports, and to undermine the position of the UK even further, as the Euro price of its exports becomes much more expensive, and so makes exporting to its major market that much more difficult.

The other effect has already been seen, prior to the announcement. It meant that the Swiss National Bank had to abandon its currency peg, causing the value of the Franc to rise by 25%. Now Denmark is in the same position, trying to limit the rise in the value of the Krona against the Euro. It will be followed by Norway, and other small states, currently outside the security of the Eurozone. The effect on financial markets, from the actions of the SNB, was rapid.  The effects on financial markets, as these other volleys fire, is likely to be even greater and more unpredictable. A number of small countries, ashas been set out previously, are at risk, because their banking sectors are many times the size of the country's GDP.

As with the effects on other countries across the globe, which have experienced rapid currency variations, as a result of QE and its removal by the US, and which have seen their inflation rates, and their interest rates move by similarly large and unpredictable amounts, the effects of QE by the ECB are likely to be more negative than positive. The SNB action showed that, despite what the media would have us believe, the central planners, in the central banks, are not Gods. In fact, they are more like would be Pinball Wizards, blindly flailing away at the flippers in the hope to send the ball off to hit the jackpot, but in reality with no idea where it is going to end up, or what richoches it might cause.

The Long Wave - Part 9

As set out in Parts 7 and 8, the basic outline of the cycle can be described as follows. The Spring phase of the cycle, is characterised as a period when the annual rate of profit is rising, and when as a consequence of increased economic activity, this causes a sharp rise in the mass of profit created. In discussing the different phases of the business cycle, and the effect on the rate of interest, Marx also outlines the other result of this.

“After the reproduction process has again reached that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended; this forms, indeed, the "sound" basis again for a ready flow of returns and extended production. In this state the rate of interest is still low, although it rises above its minimum. This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. On the other hand, those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers.”

(Capital III, Chapter 30)

In other words, the conditions can be seen here in the Spring phase of the cycle for that over exertion that leads to crises of overproduction. The rising and high annual rate of profit, not only provides the incentive for such accumulation, but it also creates the conditions for low interest rates, which thereby also encourages speculation, and swindling that leads to financial crises, which in turn have an effect on the real economy, such as occurred in 2008, but which Marx and Engels also describe in relation to the financial crisis of 1847. This is the situation that Marx is describing when, near the start of Capital III, Chapter 15, he says,

“It breeds over-production, speculation, crises, and surplus-capital alongside surplus-population.”

Marx describes this situation of a high rate and mass of profit, which leads to a rapid accumulation of capital, whilst simultaneously causing interest rates to be low, which in turn leads to crises of overproduction, and speculation also in Theories of Surplus Value.

“The same phenomenon (and this usually precedes crises) can appear when additional capital is produced at a very rapid rate and its reconversion into productive capital increases the demand for all the elements of the latter to such an extent that actual production cannot keep pace with it; this brings about a rise in the prices of all commodities, which enter into the formation of capital. In this case the rate of interest falls sharply, however much the profit may rise and this fall in the rate of interest then leads to the most risky speculative ventures.” 

(TOSV2 p 495-5)

Engels, made this clear in his description of the 1847 crisis, when he wrote,

“But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire. With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844, stock was fully underwritten, i.e., so far as there was money to cover the initial payments. As for the rest, time would show! But when further payments were due — Question 1059, C. D. 1848/57, indicates that the capital invested in railways in 1846-47 amounted to £75 million — recourse had to be taken to credit, and in most cases the basic enterprises of the firm had also to bleed.”

(Capital III, Chapter 25)

The Spring phase of the cycle is one in which the new base technologies developed in the previous Autumn phase, and which begin to be introduced in the Winter phase, where they also begin to appear as new types of industry, are rolled out more extensively. The rising and high rate of profit they bring with them, creates the conditions for crises of overproduction, as well as financial crises caused by speculation encouraged by low rates of interest, and increased supplies of loanable money-capital. But, it is only in the Summer phase of the cycle that this begins to have a demonstrable effect on the rate of surplus value, as labour supplies begin to be run down, and wages rise. 

What we have then again, is a situation where the annual rate of profit begins to fall, but not due to the law of falling profits, which requires rising social productivity, but due to the fact that the effect of previous innovations begins to wane, so that the rate of turnover of capital does not rise so quickly, the ability to reduce unit costs through greater efficiency declines, and as wages rise, the rate of surplus value falls. But, it is precisely this situation that Marx describes, in which such a fall in the rate of profit leads not to a fall in investment, but an increase, as each individual capital attempts to retain market share, by investing in additional output, in an attempt to obtain economies of scale, in additional research and development to produce new commodities and so on. This, additional investment of capital, means that the annual rate of profit falls further, but it also means that this additional investment is financed increasingly by drawing on the pool of loanable money-capital. Businesses must raise additional loans, issue additional bonds, or new shares to obtain this money-capital. This is one of the reasons that during such periods, increased economic prosperity runs in the opposite direction to financial markets.

The increased supply of bonds, reduces their prices, causing yields to rise. Rising bond yields, together with an increased issuance of shares, causes share prices to fall, and dividend yields to rise. In general, the increased demand for loanable money-capital, relative to the supply of loanable money-capital, causes interest rates to rise. As Marx puts it,

“To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level.”

(Capital III, Chapter 30)

These are the conditions described above, whereby the accumulation of capital is overwhelmingly extensive rather than intensive. This reaches its height during the Autumn phase.

“It reaches its maximum again as soon as the new crisis sets in. Credit suddenly stops then, payments are suspended, the reproduction process is paralysed, and with the previously mentioned exceptions, a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital.”

(ibid)