Sunday, 23 October 2016

Profit, Rent, Interest and Asset Prices - Part 9 of 19

In the value-form, value is always expressed as a quantity of some other use value (relative form), or conversely a quantity of some use value is expressed as a value (equivalent form), or in the form of the universal equivalent form of value, money, as a price. So, for example, a metre of linen, a use value, may be expressed as £1, a quantity of value. In fact, what is being expressed is the value represented by a metre of linen, the labour-time required for its production, in its equivalent form as a certain sum of money. But, capital is not a thing, and reflecting its nature as self-expanding value, it is itself expressed as an amount of value, in its universal equivalent form, a sum of money, whether this capital-value is itself actually a sum of money-capital, or as above a machine or some other commodity.

And that is one reason that expressing the price of money is itself irrational. The price of £1 can be nothing other than £1, because price is only value expressed in money. The rate of interest then cannot possibly be a price of money. The rate of interest is not a price of money, but a price of the use value of money-capital, or of the money equivalent of some other form of capital. Unlike say yarn, or linen whose use value is expressed in terms of some physical quantity, the use value of capital can only be expressed as some sum of value, because the use value of capital is its ability to self-expand, to change from one sum of value to some greater sum of value, i.e. its ability to earn the average rate of profit. What is being bought is the ability for such self-expansion.

“What the buyer of an ordinary commodity buys is its use-value; what he pays for is its value. What the borrower of money buys is likewise its use-value as capital; but what does he pay for? Surely not its price, or value, as in the case of ordinary commodities. No change of form occurs in the value passing between borrower and lender, as occurs between buyer and seller when it exists in one instance in the form of money, and in another in the form of a commodity... But this is only possible as long as the money acts as capital and is therefore advanced. The borrower borrows money as capital, as a value producing more value. But at the moment when it is advanced it is still only potential capital, like any other capital at its starting-point, the moment it is advanced. It is only through its employment that it expands its value and realises itself as capital. However, it has to be returned by the borrower as realised capital, hence as value plus surplus-value (interest). And the latter can only be a portion of the realised profit. Only a portion, not all of it. For the use-value of the loaned capital to the borrower consists in producing profit for him. Otherwise there would not have been any alienation of use-value on the lender's part. On the other hand, not all the profit can fall to the borrower's share. Otherwise he would pay nothing for the alienated use-value, and would return the advanced money to the lender as ordinary money, not as capital, as realised capital, for it is realised capital only as M + ΔM.”

(Capital III, Chapter 21) 

So, Marx has established the basis upon which the value of commodities can be objectively determined in terms of the labour-time currently required for their reproduction. On this basis, he is also able to determine the value of the commodities, which comprise capital, i.e. the value of the constant capital, and the variable-capital. On that basis the cost of production is objectively determinable. Moreover, because the value of labour-power is inextricably tied to the normal working-day, which is thereby also objectively determinable, the amount of new value created by labour, during that working-day, is also objectively determinable. As the surplus value, is the difference between this new value created, and the value of labour-power, the mass of surplus value is also thereby objectively determinable.

Now, on the basis of all these objectively determinable quantities, it is also possible to then objectively determine the relations between them to arrive at a rate of surplus value, and a rate of profit. As outlined above, although it is not possible to determine, in the same way, the rate of interest, the determinants of that rate of interest, the demand for and supply of money-capital, are objectively determinable, and the bounds within which that rate of interest can extend are thereby set.

Having established all of these objective bases upon which these values and proportions are established, its clear then why Marx also wants to determine rent in similar objective terms.

Capital III, Chapter 49 - Part 6

The value of the constant capital consumed in the production of any commodity, and so of the social commodity-capital, reappears in the value of that commodity. It does not require additional labour to ensure that this value is transformed.

“For it has already been demonstrated in Book I (Kap. V) [English edition: Ch. VII.—Ed.] ("The Labour Process and the Process of Producing Surplus-Value") how the old value remains simultaneously preserved in the product through the mere addition of new labour, although this does not reproduce the old value and does no more than add to it, creates merely additional value; but that this results from labour, not in so far as it is value-creating, i.e., labour in general, but in its function as definite productive labour. Therefore, no additional labour was necessary to preserve the value of the constant portion in the product in which the revenue, i.e., the entire value created during the year, is expended.” (p 835-6)

In other words, in the labour process, whereby any new commodity is produced, the expenditure of labour in the abstract creates new value, but the very fact that this is an expenditure of labour is simultaneously an expenditure of concrete labour is sufficient to ensure that the existing value of the constant capital is transferred.

For example, suppose a tailor has £100 of constant capital in the shape of cloth, thread and needles. They work for 50 hours turning them into suits. This 50 hours of concrete tailoring labour may be the equivalent of 100 hours of abstract labour, if it is complex rather than simple labour. As such it may produce a new value of £100. But, the very act of performing concrete tailoring labour is itself sufficient to have preserved the value of the constant capital, so that it is transferred to the value of the suits. They then have a value of £100 from the constant capital, and £100 of new value created by the 100 hours of abstract labour.

However, the quantity of labour performed here is irrelevant to the fact of the preservation of the value of the constant capital. Suppose the tailor had worked faster, and produced the suits in 40 hours, the value of the constant capital of £100 would just as equally have been preserved and thereby transferred to the final product. It is only where no labour is undertaken that the value of the constant capital is not preserved. Material that is never processed into a final product ultimately deteriorates, its use value diminishes, as a result of this depreciation, and so, therefore, does its value. It then represents a capital loss that cannot be recovered. This, in fact, is the difference between depreciation and wear and tear. The former represents a capital loss that cannot be recovered, the latter is the transfer of a portion of the use value, and so value of fixed capital, as a consequence of the production process, into the produced commodity, and, therefore, a value that is recovered in its price.

So, no additional labour is required to ensure that the value of constant capital is preserved and transferred to the value of the final product, apart from that which is undertaken to create this new product and new value. But, the physical constant capital that is consumed in this process must itself be reproduced, or else production in the next year could not proceed on the same scale.

Saturday, 22 October 2016

Capital III, Chapter 49 - Part 5

What is true here for the farmer is true for the whole economy, in that for all capitals that comprise Department I, the producers of constant capital, a portion of the value of their output is effectively never traded, because it must always go simply to reproduce their own constant capital. The fact that, in reality, Department I is made up of a multiplicity of different capitals, each of whom sell their output to each other, as well as to Department II capitals, who require constant capital, to produce consumer goods, does not change this fact, when the totality of these exchanges is taken into consideration.

That becomes clear, if instead of being blinded by this multiplicity of individual sales, this overall social exchange is considered, by treating all capitals involved in producing means of production as though they were a single capital, and similarly treating all the capitals producing consumer goods. In that case, the actual situation can be seen clearly, by looking at the overall exchange between these two capitals as follows.

Department I

c 4000 + v 1000 + s 1000 = 6000

Department II

c 2000 + v 500 + s 500 = 3000.

Of Department I's output of 6000, 4000 is not traded, but is used solely to replace the 4000 of constant capital value used in its own production, constant capital which was itself produced in previous years. Only 2000 of the constant capital produced by Department I (equal to the new value created by labour during the year) is exchanged with Department II, and appears as its constant capital. The total value of Department II output, of 3000, therefore, constitutes the society's consumption fund, annual product, or national income.

This annual product of 3000 is purchased by the workers in Department I, who spend their £1,000 of wages, the workers in Department II, who spend their £500 of wages, the capitalists and landlords of Department I, who spend their £1,000 of profits, interest and rent, and the capitalists of Department II, who spend their £500 of profits, interest and rent.

The other £4,000 of total output value is accounted for by the £4,000 of constant capital consumed in the production of constant capital, which is reproduced as part of the current production, and simply replaces that consumed, to ensure that production continues on the same scale.

The only way in which the total output value could be equal to the annual product is if no constant capital was consumed in the production of constant capital. In other words, to go back to the example of the farmer, miller and baker it would require that the farmer used no constant capital in the production of the wheat. Alternatively, it would require that the constant capital used by the farmer was produced by some other capital that itself used no constant capital in its production.

That essentially is the position put forward by Adam Smith, who sought to avoid the problem by simply pushing back the question of the provision of the constant capital to some other supplier. But, as Marx points out, try as he might, Smith could not find any original starting point where the production occurs purely on the basis of the expenditure of labour without constant capital.

“The difficulty is two-fold. On the one hand the value of the annual product, in which the revenues, wages, profit and rent, are consumed, contains a portion of value equal to the portion of value of constant capital used up in it. It contains this portion of value in addition to that portion which resolves itself into wages and that which resolves itself into profit and rent. Its value is therefore = wages + profit + rent + C (its constant portion of value). How can an annually produced value, which only = wages + profit + rent, buy a product the value of which = (wages + profit + rent) + C? How can the annually produced value buy a product which has a higher value than its own?” (p 834-5)

Leaving aside the question of the fixed capital, only a portion of whose value enters the value of the annual output as wear and tear, and so considering only the circulating constant capital.

“This entire portion of constant capital consumed in production must be replaced in kind. Assuming all other circumstances, particularly the productive power of labour, to remain unchanged, this portion requires the same amount of labour for its replacement as before, i.e., it must be replaced by an equivalent value. If not, then reproduction itself cannot take place on the former scale.” (p 835)

Northern Soul Classics - Love Runs Out - Willie Hutch

Friday, 21 October 2016

Friday Night Disco - That's The Way Love Is - The Isley Brothers

Capital III, Chapter 49 - Part 4

A confusion arises because it appears that the value of this annual product does include the value of the constant capital consumed. In other words, if we look at the value of final output, it appears to consist not just of the new value created by labour [I (v+s) + II (v+s)] but, also of the value of all of the intermediate production – production of materials, components, machinery, energy etc. - required as inputs for this final production.

The confusion is then compounded by the fact that each of these commodities that comprise the intermediate production, are themselves the result of a production process that involves not just the creation of new value, as a consequence of labour expended, but also itself involves the use of a range of commodities which themselves comprise intermediate production.

Assume a fairly straightforward series of such processes. A baker produces 10,000 loaves with a value of £10,000. This value breaks down as follows:

New value produced by labour £2,000

Flour £8,000

Of the new value produced, £1,000 is paid as wages to the bakery workers, and £1,000 comprises surplus value, which is divided into profits, interest and rent.

If we look then at the flour, with a value of £8,000, this comprises the constant capital of the baker, and forms part of the intermediate production of the society. Of this £8,000 of value:

£2,000 new value produced by labour employed in milling

£6,000 constant capital in the form of wheat bought from the farmer.

Of the £2,000 of new value produced, £1,000 is paid as wages, and £1,000 goes to surplus value, and is divided again into profit, interest and rent.

Finally, of the £6,000 of constant capital this comprises wheat bought from the farmer. This again breaks down as:

£2,000 of new value produced by agricultural labour.

This £2,000 of new value is again divided £1,000 of wages and £1,000 of surplus value. But, what about the other £4,000 of value of the wheat?

The total value of production available for consumption in the form of bakery products is £10,000, but the total amount of new value produced by labour, and divided as revenue between wages, profits, interest and rent is only £6,000! If we take the total national income £3,000 as wages and £3,000 paid to capitalists and landlords, its clear that there is not enough national income to buy the total value of national output.

There is a shortfall of £4,000. A look at the above figures shows why this is the case. Of the farmer's production, which is the first element of intermediate production, only £2,000 of the value of output of £6,000 comprises new value, i.e. the value produced in this year. So, where does the other £4,000 of value in this production come from?

Quite simply, as with the baker and the miller this additional value comes from the constant capital used by the farmer. In other words, the farmer's output of wheat does not spring magically from just the expenditure of labour, creating new value this year. It also requires inputs at least in the shape of seeds, but in reality also fertiliser, machinery and so on. In other words, constant capital. But, this constant capital used in the production of the farmer is not output created this year, nor is it value created this year. The seeds and other constant capital the farmer uses in their production this year, is comprised of commodities produced last year, and in previous years!
The Physiocrats were ahead of Adam Smith, Marx says, because they recognised that the starting point for understanding national output, and social reproduction is last years' harvest/production.  They recognised that a part of the value of this year's production comprises the value of the circulating constant capital produced last year (and previous year's), and so provides no part of this year's incomes (National Income).  They also recognised that for the same reason the materials produced last year, and used this year in production, must be physically replaced, on a like for like basis, out of this year's production.  In this way, they avoided Adam Smith's "absurd dogma" that the value of output (c + v + s) can be resolved into revenues (s + v).  An absurd dogma that continues today in the idea that National Output equals National Income/Expenditure.
The reality is that the total value of output of £10,000 could not possibly all be comprised of revenue (wages, profits, interest and rent), and thereby consumed, because a portion of the total value of this output comprises not just new value produced, but also the value of constant capital (not fixed capital, but circulating constant capital, plus wear and tear) which is itself the consequence of production not this year, but in previous years. Not all of the total value of output can be consumed, because an equivalent portion of this output value must be set aside solely to replace this constant capital, produced in previous years, and used in this year's production.

If we were to restate the example, therefore, starting with the farmer we would have the following:

Value of wheat produced £6,000 made up

c 4000 + v 1000 + s 1000.

Of the farmer's production, £4,000 of the value is not sold, but as seeds is used to replace the seeds used in its production, and which were themselves the product of last year's harvest, not this year's production. The farmer then sells the remaining £2,000 of wheat to the miller. The miller's output then has a value of £4,000 made up of:

c 2000 + v 1000 + s 1000.

The miller then sells this £4,000 of flour to the baker whose value of output is £6,000, made up:

c 4000 + v 1000 + s 1000.

The baker's output constitutes the value of the society's consumption fund. It is equal to National Income and Expenditure, or the national annual product. In other words, it is equal to the new value created by labour during this year.

The baker's £6,000 of bread is bought by the worker's who spend their £3,000 of wages, and by capitalists and landlords who spend their £3,000 of profits, interest and rent.

But, its clear that although the society's consumption fund, its national product, and national income and expenditure is equal to £6,000, the total value of this society's production during the year was £10,000. This comprised the value of its national output, as opposed to its national income, or consumption fund.

The total value produced by the farmer was £6,000, and the miller added £2,000 of value to this making £8,000, whilst the baker added a further £2,000 of value to this making £10,000.

To be clear, the difference here is not accounted for by fixed capital, which only passes part of its value, as wear and tear, to the final commodity-capital. The difference does not arise because fixed capital is produced, in previous years, and only part of its value is consumed this year. The difference here does not comprise the fixed capital of the farmer, but his circulating constant capital, in the shape of his seeds.

Back To Part 3

Forward To Part 5

Thursday, 20 October 2016

Profit, Rent, Interest and Asset Prices - Part 8 of 19

When the rate of profit is high, the demand for money-capital will be high, but that same high rate of profit also means that the realised profits assume the form of potential money-capital. Firms may utilise it internally for accumulation, or else they may throw it into the money market. So, the supply of money-capital may also rise, causing the rate of interest to remain low, or even fall. Only when the demand for money-capital begins to outstrip the supply will interest rates rise. There is a constant interrelationship pulling in different ways, as was the case described above in relation to the rate of profit, accumulation of capital, demand for labour-power, movement in wages, and consequent changes in the rate of profit.

Here, rises in the rate of profit lead to a higher demand for money-capital for capital accumulation, but the higher rate of profit increases the supply of money-capital too, when interest rates do rise, the higher rate of interest causes the owners of money-capital to supply more of it, whilst industrial-capitalists seek to demand less of it, as higher interest payments reduce the ability for industrial capital to accumulate. As Marx describes all these interrelations, in Capital III,

“To this confusion — determining prices through demand and supply, and, at the same time, determining supply and demand through prices — must be added that demand determines supply, just as supply determines demand, and production determines the market, as well as the market determines production.”

(Chapter 10)

The basis for the increased supply of money-capital, when interest rates rise is clear. The profit produced by productive and commercial capital is divided into a number of different revenues. Landlords obtain rent from the productive and commercial capitals for the land that is leased by them; the owners of shares or bonds, obtain interest on the money-capital they have loaned; the functioning capitalists obtain profit of enterprise. Part of these various revenues must always be used by the recipients as revenue. In other words, as Marx points out in Capital II, simple reproduction always remains at the heart of capitalist reproduction, because the individual capitalists, and other appropriators of surplus value, must consume to reproduce themselves.

This too is a contradictory process. On the one hand, as capitalism develops, the capitalists begin to get a taste for the high life, and standard of living of previous ruling classes. On the other hand, the demands of competition mean that individual private capitals must accumulate capital from profits, rather than consume it unproductively, in order to retain and expand market share, so as to survive.

“It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integrate part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production. It will never do, therefore, to represent capitalist production as something which it is not, namely as production whose immediate purpose is enjoyment or the manufacture of the means of enjoyment for the capitalist. This would be overlooking its specific character, which is revealed in all its inner essence.”

(Capital III, Chapter 15)

On the other hand, the continual revolutionising of technology and production that raises productivity and makes possible this increased rate of expansion, also reduces the value of commodities. The reduction in the value of commodities not only reduces the value of the constant and variable capital, so that any given mass of surplus value will buy more of those commodities, but it also reduces the value of all those commodities that the capitalists and other exploiters consume unproductively. Consequently, the proportion of the revenue that must be allocated to this simple reproduction is reduced, enabling that revenue to be transformed into additional money-capital.

When interest rates are high, they are more likely to convert their revenues into money-capital loaned to industrial capitalists for productive purposes. So, the supply of money-capital would rise pushing down on interest rates.

When interest rates are low, the owners of this potential money-capital are more likely to consume their revenues, be they in the form of rent, interest, or profit of enterprise, unproductively, whether it is buying more luxury goods, or engaging in financial speculation and other forms of gambling. Or they may utilise these revenues directly themselves as productive-capital so as to produce profit. In that case, the supply of money-capital would be reduced, pushing up on interest rates. 

“It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.” 

(Capital III, Chapter 23, p 378)

Considered globally, for example, huge reserves of potential money-capital have been accumulated in sovereign wealth funds. A lot of the money that flows into these funds comes from rents received by oil or other primary product producing countries. A proportion of those funds goes as actual loanable money-capital. In other words, it buys newly issued bonds or shares, which provides money-capital to businesses across the globe, which is then metamorphosed into productive or commercial capital. But, another portion has also been utilised for speculation, that is simply buying up, at inflated prices, existing bonds and shares, and other assets.

These sovereign wealth funds, in turn, as owners of fictitious capital, also obtain revenues in the shape of interest. They receive payments of coupon interest on the bonds they own, and dividends on the shares they own. This revenue, as interest, can also be utilised either as actual money-capital, that is metamorphosed into productive and commercial capital, or else can again be used for speculation, to again buy up existing bonds and shares, thereby pushing those prices higher once more. In addition, a country like Norway, which has a very large sovereign wealth fund, built up from the rents from oil production, may also utilise the revenue stream it produces to finance government expenditure to cover things such as pensions, and other welfare payments.

Similarly, countries like Norway, Russia and Saudi Arabia, utilised the rents they received from oil and other primary production to directly finance state expenditure. When primary product prices were high, these rents could finance this expenditure whilst leaving large surpluses available to be built up within the sovereign wealth fund. As primary product prices have collapsed – itself a consequence of previous capital over-accumulation, resulting from high prices and profits in those sectors – although the states continue to obtain rents, those rents have shrunk, and a greater proportion of them is required to finance state spending – consumption/revenue – leaving a smaller proportion available for conversion into money-capital. In the case of Saudi Arabia, it has gone from being a huge provider of potential money-capital, to being a borrower of money-capital, so as to finance its state spending.

But, the main form of wealth for private capitalists today, of the 0.001% of the population in each country, is that of fictitious wealth, of fictitious capital in the shape of shares and bonds, and property. Although, the astronomical inflation of these asset prices has caused a corresponding drop in yields on these assets, for that tiny minority that own these assets on such a huge scale, the actual amount of revenue they obtain is still huge. Take someone like Bill Gates with a personal fortune of around $40 billion. Even if he obtained a yield of just 1% p.a., on those assets, it would mean a revenue of $400 million a year, way beyond what any individual could rationally require, even with the most lavish of lifestyles.

In a global population of 7 billion the top 0.001% amounts to around 70,000 people with a similar amount of fictitious wealth as Bill Gates, and similar levels of revenue, or around $28,000,000,000,000 ($28 trillion of income). By comparison, global GDP, i.e. the new value created by labour, during the year, is around $70 trillion. These individual private money-capitalists, therefore, have huge annual revenues at their disposal in the form of interest and rent, which can be utilised either for unproductive consumption, for speculation, or else to be converted into actual money-capital. A marginal decision one way or the other to convert this revenue into money-capital, rather than to use it unproductively for consumption or speculation, therefore, can have a significant impact on the supply of money-capital.