Tuesday, 30 June 2015

Suspended Disbelief

Writers and film makers talk about the need for a suspension of disbelief. That is, we all know that a man cannot fly, so how could we sit and enjoy a Superman film, whose central thesis is about a man who can fly? We can only do so by suspending disbelief. Having watched the film, we can go back to our belief that men cannot fly. Watching the events unfolding around Greece, and the comments of various bourgeois pundits and politicians, as well as the response to events by financial markets, it seems once again that in order to follow this story we again have to suspend disbelief.

The various bourgeois pundits are asking us to believe in things that simply, on any rational basis, are not possible. Some of the things they are asking us to believe are simply a repetition of the lies being put out by conservative politicians, but even where that is not the case, they want us to believe a scenario of how things could be resolved, which is simply unbelievable – not just difficult to believe, but logically, practically and physically impossible. What is more that is increasingly not the case just with Greece, but with what we are being asked to believe about the global financial system as a whole. For example, its not just Greece that is about to default on its debt. Yesterday, Puerto Rico announced that it simply could not repay its debt on its Municipal Bonds. Half of all US Municipal Bond Funds have Puerto Rican bonds in their portfolio.

Puerto Rico is not the only one. Detroit has also basically gone bust, Chicago is heading in the same direction, and large numbers of other cities, across the US, are in a similar position. Last week, I pointed out that the Chinese stock market is in a huge bubble, having risen by 128%, in the last year alone. I suggested that in the face of the institutions not reaching a deal with Greece, Asian markets were likely to crash when they opened on Monday. The Chinese Stock Market crashed by 7.5%, before later recovering, and closing down 3.5%, despite intervention by the Peoples Bank of China, which cut official interest rates further, slashed banks' reserve requirements, and made credit even easier.

This reflects a situation I set out more than five years ago, of a series of bifurcations in the global economy and financial system. We have a number of economies which have been acting rather like Britain did in the 19th Century, China being the most notable, in that they have been pumping out vast quantities of commodities into the global market. But, that has not been matched by an equal value of commodities moving in the other direction, at least not from a range of the economies importing those commodities, such as the US and UK. Other economies have been sending large quantities of commodities to China, in the form of the raw materials, energy and so on it has required to keep its industrial engine going. The consequence is that many of these latter economies, as well as economies like China, have been building up large surpluses. Those surpluses have been matched by large deficits in economies like the US and UK.

At the same time, those large companies, particularly in the high value areas of production, such as various forms of new technology, have themselves built up vast reserves of cash, as their rate and mass of profit has soared in the last three decades. But, workers and small capitalists have themselves built up increasing amounts of debt. In fact, in both the US and UK, one form of debt that did not even exist 30 years ago, on any kind of significant level, student debt, has taken on significant proportions. The average UK student now goes into the world with a debt of around £80,000! In the US, student debt stands at over $1 trillion, and is one of the only forms of debt that you cannot wipe away by declaring bankruptcy.

In the US, the 2008 housing crisis that acted as a spark for the financial meltdown was founded upon huge amounts of mortgage debt built up to preposterous levels, for the simple reason that house prices were continually inflated, and the reason the prices could be continually inflated was because borrowers were allowed, and encouraged, to take on ever increasing levels of unsustainable debt, to pay for houses at increasingly unsustainable prices. The same thing happened in the UK, but here the resolution of that contradiction is yet to play out, in its inevitable manner, via a violent crash in property prices, as it did in the US, Ireland, Spain and so on.

But, this is another illustration of the suspension of disbelief. In 2000, the NASDAQ stock index in the US, hit 5000. The price of technology shares had been rising often by high double digit percentages, every year from the mid 90's. The Financial Times wrote that it was a bubble, others said it was a bubble, but other financial pundits, particularly those representing the equity funds, came out to say, no this time it was different. By March 2000, the NASDAQ crashed. It fell by 75%! Its only just, 15 years later, got back above 5,000 and many believe that its once again in a bubble.

When I bought my first house in 1977, I paid £5,000. Today, the average house price is said to be £200,000 plus. That is a 40 fold increase in less than 40 years. But, wages and other living standards have not risen 40 fold during that period. Its what led even one Tory Minister to compare house prices with the price of a chicken. If the price of chicken had risen in the same proportion as house prices, he said, then a standard chicken today would cost you £47. These house prices, like stock market prices are quite obviously not unsustainable, any more than was the NASDAQ at 5000 in the year 2000. 

The Dow Jones Index rose 1300% between 1980 and 2000, but its economy grew by only a small fraction of that amount.  The Dow Jones today is 1700% higher than in 1980, and again that is many times the actual increase in its economy during that period. You have to suspend disbelief to allow yourself to accept that these astronomical prices can continue, rather than running for cover, in the sure and certain knowledge that their must be an almighty crash when appearance comes into line with reality.

If you allow yourself to believe that a man can fly, and on that basis jump off a 100 floor building, you might be able to sustain that suspension of disbelief for a while, as you appear to fly. But, eventually the reality of that flight catches up with you. Falling is not flying. And that is a good parallel with the build up of debt to sustain high house prices, and stock prices. What appears to be rapidly growing wealth, as these asset prices rise, is in reality merely growing debt.

Another example, is given by the statements of various financial pundits. At almost every opportunity in the last few weeks, they have lined up to announce that for this or that reason the Federal Reserve will not raise official interest rates until next year. Why? Because they know that the inflated level of stock and property markets is based upon these low official interest rates, and the oceans of liquidity that the banking and shadow banking system has been pumping into financial markets. And so, these prophets of the free market find themselves in the position of having to argue that central planners can dictate the price of loanable money-capital! Why because, as soon as they stop their suspension of disbelief, as soon as they stop watching the movie, and return to the real world, they have to recognise that the astronomically high levels of shares, bonds and property are not sustainable. They look down, and see there is nothing below holding them up, and so they must fall to earth.

That is not possible for such pundits, because their whole existence depends on the movie continuing, on the continuance of the suspension of disbelief. But, they are supported in that, because all of those people who have seen their fictitious wealth in the form of their shares, and property prices rise, have every reason to continue to suspend disbelief too. Why wouldn't they want to see the movie continue in which they see their apparent wealth rise year on year, without any effort or hard work from themselves? It is the movie that newspapers like the Daily Express, whose readership is made up of such people, is happy to contribute to.

And of course, the reality behind the situation in Greece is not really any different. Just like the people who were encouraged to buy houses at ridiculously high prices, or who have been persuaded to take on increasingly ridiculous levels of student debt, which many will never be able to repay, let alone recover in higher earnings, during their lifetime, so Greece, and other peripheral Eurozone economies were encouraged to take on debt, to finance their own unsustainable levels of consumption. Of course, in the case of these economies, it is not the ordinary citizens who undertook this unsustainable consumption, in large part, other than those who also thought they could get rich quick by investing in property, which inevitably crashed, it was the rich who were the ones borrowing to buy Mercedes imported from Germany, or who were making millions from shady construction schemes, often tied to corrupt politicians, an so on.

And once again, in listening to the comments of conservative politicians and pundits it is again necessary to suspend disbelief to not simply fall around laughing, or tear your hair out in despair. Greece has to suffer this austerity, because they over borrowed and overspent in the past, they say, rather like if you drink too much, you shouldn't complain about the hangover that follows. But, the trouble here is that the people who suffer not just a hangover, but the lobotomy, are not the people who overbought or over borrowed. The rich Greeks who did that, have long since taken their ill-gotten gains out of the country, along with the corrupt politicians who for decades created such a clientelist state. It is the ordinary Greek worker and peasant, who had no say in any of those decisions, and was no part in robbing the country blind, who is being asked to make good the cash in the coffers that the rich robbed out of it.

A similar thing was seen in Ireland, where property prices were again driven sky high before collapsing by 60%, and where on the back of it, the banks over lent, and lent to finance construction schemes that collapsed. It was not the banks that suffered the consequence of that. They got the Irish capitalist state to bail them out, just as the capitalist state in many other countries, including Greece, bailed out the banks that had caused this catastrophe. And, the state then asked the ordinary citizen who had been no part of this scam, to pick up the tab. If the workers in Ireland, Portugal, Spain, Italy and other countries are themselves able to step outside the movie theatre and end the suspension of disbelief, they would this week be on the streets, like the workers in Greece, demanding that an end be put to any further bailout for the banks, and thereby for the rich money lenders who for decades have gained from lending out money recklessly, but want to take none of the consequences when they fall due.

Because, what is the truth about this debt, and these banks and other financial institutions. The reality is that if all of the debt were wiped away tomorrow, it would make not one jot of difference to the ability of any company to continue to churn out whatever it produces. It would have no detrimental effect on real wealth whatsoever. What is it that a bank produces? Nothing other than debt! Nothing other than a claim to a share of future revenues, without contributing anything to the production of those future revenues. If all of the debt were simply cancelled, if all share values effectively fell to zero, if property values fell to near zero, it would have nothing but a massively beneficial effect, for the vast majority of people.

The only people who would suffer, as Marx points out, are the owners of that fictitious wealth. But, the destruction of the fictitious wealth of an infinitesimally small number of money lending capitalists is nothing compared to the beneficial effect it would have on promoting real wealth creation. And, in fact, Greece is again an example of that.

Marx talks about bankers being prepared to destroy millions of pounds of real wealth, in the form of productive-capital, just to defend the fictitious value of bits of paper. In other words, they were prepared to send the real economy into a recession in order to defend then the value of the pound, and the various debts that existed. That is exactly what we see again today. In Greece, the movie we are watching has billions of Euros being poured into a bankrupt Greek economy. But, of course, the reality is that none of this money actually even touches the sides of the Greek economy. Rather like the payment of Housing Benefit to poor tenants, which actually just goes straight to grasping private landlords, so nearly all of the money coming into Greece, from the IMF and ECB, goes straight out again to pay the interest, and repay the capital to those who recklessly lent to Greece, over the last 20 years. In other words, once again the reality is that the ordinary Greek citizen is asked to suffer increased austerity, whilst the well heeled money lenders, get bailed out with billions of Euros fed through Greece, and straight back out to those lenders! The real losers if the support for Greece stops will be those lenders who will no longer keep getting supported by this drip feed from the taxpayers of Europe.

During the last five years, real productive-capital, and the potential for creating profits in Greece has been decimated. The economy has shrunk by 25%, unemployment has soared, and instead of the proportion of debt to GDP falling, it has risen from 120% to 180%.

But, perhaps one of the greatest acts of suspension of disbelief has to be to swallow the line being pushed by the conservative politicians in Greece, and across Europe. Spokespeople from New Democracy in Greece are so brazen as to be unbelievable. They seem to have learned from George Osborne and the Tories that if you are going to lie about your opponents, make it a very big lie. It is New Democracy that was the government responsible for taking on much of this unsustainable debt, and for going along with the fiddling of the figures so as to get Greece into the Euro. Of course, they were not alone, PASOK was just as guilty, and both paid the price electorally for having done so. Syriza is only the government, today, because of the economic and financial chaos that New Democracy and PASOK created over decades.

Yet, having come to office only five months ago, it is Syriza that the conservative politicians want to blame for the current situation. That is rather like the way the Tories, in Britain, for 18 years, under Thatcher and Major, not only failed to repair the roof whilst the sun was shining, but actively stripped the roof, and oversaw the destruction of the fabric of the building, as they allowed roads, hospitals and schools to fall into disrepair. At the same time, they too drove down wages, and encouraged workers to consume by taking on debt, which created the conditions for the financial crisis of 2008.

It was Labour that began to repair that situation after 1997. Yet, Osborne and Cameron were able to not only blame Labour for the financial crisis, but also to claim that Labour had overspent! You have to have not been paying attention to what was actually going on, or else to have completely suspended disbelief to swallow that story.

And that brings me to the last example of where there is a suspension of disbelief going on. It is the idea that Syriza could in some way accept the offer that was being put to them. Over the last few weeks, conservative politicians in Greece and elsewhere have been gloating, as Syriza made concession after concession to the institutions. “You see,” they chuckled, “Tsipras has had to succumb to reality and climb down, for all his rhetoric.” They anticipated that at some point Tsipras would split Syriza and form the coalition with the centre right To Potami that they had wanted to force him into after the election at the beginning of the year.

Now, having been telling us that Tsipras was making concession after concession, these same conservative politicians now tell us that Tsipras and Syriza were making no concessions at all, that they were negotiating in bad faith, and that it is they who are responsible for the collapse of talks! But, no one can believe this nonsense, today, because the world those politicians and the right-wing media lived in has gone. For weeks, social media has been reporting what was actually going on as far as those talks were concerned.

Paul Mason reported it here. But, other journalists, including those from papers like the FT, have been reporting over the last week or so, that it has been the institutions that have been playing games. First we were told that the proposals put forward from Syriza were a good basis for a deal, and then within hours, the institutions came back with masses of red lines through the document, being described by some as though they were marking Syriza's homework.

There has been no doubt for some time that the institutions were really after regime change. Some right-wing pundits seem to believe that some form of national government could be established in Greece, but, of course, it can't, or at least not one that will stand up when the first political wind blows against it. There is no part of Syriza that could be part of such a government, the centre right around New Democracy has effectively been destroyed, PASOK has more or less disappeared. The only way such a government could come about is if there were new elections, and the people voted for right-wing parties.

But, new elections would mean several weeks elapsing before any resolution. Moreover, as things stand the likelihood is that in any new elections, it would be Syriza that would be returned with an increased majority, probably no longer needing the Independent Greeks. On Sunday, Syriza effectively wins either way. If the people vote No, it will have a strengthened mandate, and the bluff of the institutions will have been called. If they vote Yes, Syriza will resign, and new elections will be held, or else someone else will be asked to form the government. But, as things stand, Syriza will then be able to adopt a position of extreme opposition, using its majority of seats in Parliament to simply vote down any austerity measures proposed by the next government.

The conservatives across Europe and their media are running around like headless chickens trying to present the vote on Sunday as a vote to stay in or leave the Eurozone. It isn't, it is a vote to accept or reject austerity, and instead to build a better Eurozone, built on the kind of principles of solidarity that the EU was supposed to foster. Several years ago, Mario Draghi said he would do everything required to defend the Euro, but at the first real test, he has failed to do so. The conservatives have tried from the beginning to present Syriza as anti-EU, because that fits their narrative. They cannot allow an alternative narrative that breaks the spell of the idea that the only solution to the massive debt, and inflation of asset prices that their policies have created, is austerity and the continued bail out of the money lending capitalists. A No vote on Sunday will be part of breaking that spell.

Greek workers should vote No on Sunday, and in the meantime workers across Europe should mobilise against the conservative forces trying to push Greece out of the Eurozone. Syriza should feel no responsibility to bail out the Greek capitalist banks. Let them go bust along with their debts to other banks and governments across Europe. Syriza should support the workers of those banks taking them over and turning them into a Greek worker owned co-operative bank, freed of its bad debts and non-performing loans. The government, as soon as the ECB cuts off support, should instruct the Greek central bank to take government paper in return for the deposit of electronic Euros into the governments account, so that it can continue paying wages and pensions and other bills.

The problem, as Marx sets out is not a lack of money. To the extent any economic problem exists it is a lack of capital. If people have funds in their accounts, they do not need Euro notes and coins to make payments. They can be made by electronic transfer, payment by debit or credit card, or even good old fashioned cheques! Provided people in Greece, continue to produce real value, and surplus value, there is no reason why what is an externally induced liquidity problem should be turned into a solvency crisis. The insolvency of Greek businesses, and families should not be induced simply in order to continue to hide the actual insolvency of the Greek and global banking system.

Capital III, Chapter 9 - Part 8

The situation described in Part 7, in relation to individual capitals, is not the case with the total social capital, however, because there the price of production is equal to the value of the social commodity-capital. So, here to say the cost-price is less than the value is identical to saying the cost-price is less than the price of production.

“And while it is modified in the individual spheres of production, the fundamental fact always remains that in the case of the total social capital the cost-price of the commodities produced by it is smaller than their value, or, in the case of the total mass of social commodities, smaller than their price of production, which is identical with their value.” (p 165)

The formula for the price of production can then be stated as equal to k + kp', where k is the cost of production and p' is the general rate of profit.

Marx says that the price of production in any sphere changes:-

“1) If the general rate of profit changes independently of this particular sphere, while the value of the commodities remains the same (the same quantities of congealed and living labour being consumed in their production as before). 

2) If there is a change of value, either in this particular sphere in consequence of technical changes, or in consequence of a change in the value of those commodities which form the elements of its constant capital, while the general rate of profit remains unchanged.

3) Finally, if a combination of the two aforementioned circumstances takes place.” (p 166) 

But, as set out previously, the price of production could rise, even if the value of the commodity falls, if the general rate of profit rises sufficiently, and vice versa. But, the processes that lead to the formation of a general rate of profit are many and varied. Mostly, they neutralise each other, and thereby can only be detected after very long periods. This is one reason why those theories that try to explain capitalist crises on the basis of the tendency for this rate of profit to fall are way off the mark. They are like a theory that describes the cause of of every aeroplane crash by blaming gravity.

“In spite of the great changes occurring continually, as we shall see, in the actual rates of profit within the individual spheres of production, any real change in the general rate of profit, unless brought about by way of an exception by extraordinary economic events, is the belated effect of a series of fluctuations extending over very long periods, fluctuations which require much time before consolidating and equalising one another to bring about a change in the general rate of profit. In all shorter periods (quite aside from fluctuations of market-prices), a change in the prices of production is, therefore, always traceable prima facie to actual changes in the value of commodities, i. e., to changes in the total amount of labour-time required for their production.” (p 166)

From the perspective of the total social capital, the sum of values equals the sum of prices. The fact of whether these prices are measured in terms of a money commodity, such as gold, or in terms of money tokens, where credit-money also circulates, is irrelevant precisely because values are measured also by the same medium. It matters not one jot whether the value of these money tokens is devalued, therefore, by half or any other figure because the measurement of values and prices changes in exactly the same proportion. So,

“... it is evident that from the point of view of the total social capital the value of the commodities produced by it (or, expressed in money, their price) = value of constant capital + value of variable capital + surplus-value. Assuming the degree of labour exploitation to be constant, the rate of profit cannot change so long as the mass of surplus-value remains the same, unless there is a change in either the value of the constant capital, the value of the variable capital, or the value of both, so that C changes, and thereby s/C, which represents the general rate of profit. In each case, therefore, a change in the general rate of profit implies a change in the value of commodities which form the elements of the constant or variable capital, or of both.” (p 166)

Monday, 29 June 2015

Capital III, Chapter 9 - Part 7

In a sense, trying to identify the exchange value, at this stage, becomes pointless. What remains true is that the Law of Value remains in operation. But, just as this law operated in a different form prior to commodity exchange, so now it adopts a different form under capitalism as commodities exchange not at their exchange values but at their prices of production.

Society cannot escape the fact that it has limited social labour-time. Using more for the production of one commodity means less for some other. If the labour-time required to produce one commodity rises, its value still rises, but how this is ultimately now manifest depends on a series of intervening factors that determine its price of production.

Marx recognises this change and writes,

“For all other purposes, the statement that the cost-price is smaller than the value of a commodity has now changed practically into the statement that the cost-price is smaller than the price of production.” (p 165)

In other words, prices have now replaced values as the determining factor. It may even now be possible for the value of a commodity to fall, i.e. less labour-time be required for its production, and yet its price rise, depending on what happens with the prices of production of all those other commodities that make up its cost price. For example, the value of input A might fall because of the introduction of some new machine. But, the producer of A will obtain the same rate of profit on their total capital employed. If the general rate of profit rises, A's profit will rise with it, and so will the price of their commodity. Buyers of A's commodity will then see their cost prices rise even though now less social labour-time is required for its production. That will then carry through to the price of production of their own commodity.

For example,

c 200 + v 400 + s 400 = 1000;

an average rate of profit of 50%, gives a selling price, however, of 900, i.e. 200 + 400 = 600, p' = 50%, profit = 300, selling price = 600 +300 = 900.

c 400 + v 200 + s 200 = 800; 

an average rate of profit 60%, gives a selling price of 960, i.e. 200 + 400 = 600, p' = 60%, profit = 360, selling price = 600 + 360 = 960.

So, although the exchange value of A has fallen from 1000 to 800, the selling price has risen from 900 to 960.

Sunday, 28 June 2015

Greece Imposes Capital Controls. Who's Next?

The ECB has agreed to keep its funding of Greek banks through the Emergency Lending Agreement at its current level, but not to increase it.  Given a run on bank cash machines - partly encouraged by right-wing politicians and the right-wing Greek media - that means that Greek banks were in danger of running out of currency.  Some already had.  The government has, therefore, told the Greek central bank to declare tomorrow a bank holiday; banks and the Greek stock exchange will remain closed, and capital controls will be imposed to prevent excessive funds being taken out of the banks.

Let's be clear what the problem here is.  For many things, people do not need currency.  Many bills are paid by direct debit, other payments are made by credit or debit card.  Even for smaller payments today, currency is not required.  You can pay with ApplePay and similar electronic payment systems.  Across large parts of Africa nowadays, many payments are made using cashless payments systems from mobile and smart phones.  The problem is not a lack of money, or a need for currency - money in the form of notes and coins.  So long as you have a positive balance in your bank account, you can pay bills and so on as normal by these electronic means.

The reason people are taking notes and coins from the bank accounts - and why the rich Greeks have taken money out electronically in transfers to foreign bank accounts - is a fear of what happened in Cyprus.  That is, if the banks themselves go bust - and the Greek banks like nearly every other bank across the EU is really insolvent - then the money in the bank itself could just disappear.  As Cyprus showed, and as the EU decided after that, savers deposits in those banks are not then safe.  There is supposed to be the EU's €100,000 deposit guarantee scheme, but in a big financial crisis, that could be scrapped overnight.  The EU policy now is that when banks go bust, the savers as well as the bondholders and shareholders get "bailed-in" to pay for it.

With that in mind, Greeks have been trying to get their hands on their money, before someone else does.  When Cyprus went belly-up, a major cause, besides the fact that it had accumulated massive deposits, was that Cypriot banks were big buyers of Greek debt.  They are likely to be some of the first to be hit once again, as Greece defaults, especially given they have not really recovered.  But, their are numerous small countries, whose banks are at least or more exposed.  Any savers in those countries would have been well advised to have been getting Euros out of the ATM's in those countries while they could, because, come next week, its anybody's guess, which country will be next to find its banks are in trouble, as the shockwave from Greece reverberates, and those other countries follow Greece in shutting the bank doors, and imposing capital controls.

The ECB, EU and IMF seem to have shown themselves not fit for purpose.  No one can have any confidence that they will be up to the task as this crisis unfolds.  In 2008, it was Gordon Brown who provided the lead that these governments, and institutions followed.  Does anyone really believe that George Osborne can fulfil that role today.  After all he is the one who crashed the UK economy after 2010, and despite all their hype, the UK economy today, is growing at just 0.3%!  The IMF have called it wrong at almost every step, and Lagarde is just a politician put up as a PR front for the organisation, and whose stance changes with the wind, but always long after the event.

Under those conditions, its no wonder people in Greece are trying to get their hands on actual cash. The institutions are fiddling while the Treaty of Rome burns.

Capital III, Chapter 9 - Part 6

In addition, besides the variations in the rate of profit, arising from differences in the organic composition of capital, there are those differences that arise from different rates of turnover of capital. Where there are two capitals of equal size, it has been shown that the capital that turns over more frequently obtains a higher rate of profit. In consequence, then the price of production of those capitals that turnover less frequently will be higher than their exchange value, and vice versa. Capital will move away from the former, reducing supply and raising prices, and towards the latter, raising supply and reducing prices.

This movement of capital into different spheres, thereby bringing about a redistribution of the total social capital, then also raises another interesting question. In determining the average rate of profit, it is not simply a matter of taking all the individual rates of profit from each sphere and obtaining an average. If the rates of profit are A 10%, B 20%, C 50%, we can't simply sum these and divide by 3 to obtain an average 30%. If A represents 50% of the economy, B 40% of the economy and C only 10% this has to be accounted for in determining the weight of each sector in the average.

But, if as a consequence of these movements of capital to higher profit sectors, those sectors increase as a proportion of the total social capital, this will have an effect on the average rate of profit, which will thereby be raised, as I have set out elsewhere.

Suppose sphere A is a non-capitalist sector where exchange values rule. We can then assume that at these prices demand and supply are in equilibrium. The reason prices fall is because when capital invades this sphere it increases supply, so that it exceeds demand at the old price. The fact that supply is now greater than it was, i.e. output has risen, does not mean that more surplus value is produced, precisely because this increase in supply signifies an expenditure of labour-time that was not necessary on the basis of exchange values.  As the table above suggests, however, the fact that capital is being accumulated into areas with a low organic composition, does mean that a proportionately greater mass of labour-power is employed, and that means an increased mass of surplus value.

However, if sphere A produces, for example, food then the price of food will fall, if capital flows into this sphere. That means that the value of labour-power will fall throughout the economy, including in sphere A. On the one hand, profits in A will fall as prices fall, on the other they will rise as the rate of surplus value rises across the economy.

“The general rate of profit is, therefore, determined by two factors:
1) The organic composition of the capitals in the different spheres of production, and thus, the different rates of profit in the individual spheres.
2) The distribution of the total social capital in these different spheres, and thus, the relative magnitude of the capital invested in each particular sphere at the specific rate of profit prevailing in it; i. e., the relative share of the total social capital absorbed by each individual sphere of production.” (p 163)

It is clear why at this point, both historically and logically, Engels is led to say,

“In a word: the Marxian law of value holds generally, as far as economic laws are valid at all, for the whole period of simple commodity production — that is, up to the time when the latter suffers a modification through the appearance of the capitalist form of production. Up to that time, prices gravitate towards the values fixed according to the Marxian law and oscillate around those values, so that the more fully simple commodity production develops, the more the average prices over long periods uninterrupted by external violent disturbances coincide with values within a negligible margin. Thus, the Marxian law of value has general economic validity for a period lasting from the beginning of exchange, which transforms products into commodities, down to the 15th century of the present era.” (p 899-900)

That is because from the 15th. century onwards, the invasion of capitalist production replaces the sale of commodities, based on exchange values, with their sale based on prices of production. Because these prices of production also determine input prices, market prices for all commodities become increasingly separated from exchange values. The Law of Value continues to operate in the way Marx describes in his letter to Kugelmann, that is the society has a limited amount of labour-time available to meet its needs for the production of use values, and has to allocate that time accordingly. However, that process is now increasingly mediated by prices of production rather than exchange values. Indeed, it becomes impossible to determine exchange values because all costs of production are denominated in prices not exchange-values. 

“We had originally assumed that the cost-price of a commodity equalled the value of the commodities consumed in its production. But for the buyer the price of production of a specific commodity is its cost-price, and may thus pass as cost-price into the prices of other commodities. Since the price of production may differ from the value of a commodity, it follows that the cost-price of a commodity containing this price of production of another commodity may also stand above or below that portion of its total value derived from the value of the means of production consumed by it.” (p 164-5)

“The transformation of values into prices of production serves to obscure the basis for determining value itself.” (p 168)

Saturday, 27 June 2015

The Institutions Have 24 Hours To Avoid A Global Crash

In just over 24 hours from now, the Asian financial markets will begin trading. Unless the ECB, EU and IMF have come up with a deal that provides Greece with a viable solution that the Greek people can accept, there will be turmoil on those markets. Everyone wanting to get out of all those shares, bonds and other financial assets that are likely to crash, before the European and then US markets begin trading, will rush to sell first, via the Asian markets, before global prices crash. Those Asian markets, as I reported recently are already very fragile. The Shanghai Composite Index is in a huge bubble, having risen 128% in the last year alone, largely financed on cheap credit. It is forecast to drop by at least 50%. The Chinese property market is also in a huge bubble, reminiscent of Spain, with entire cities having been built that remain unoccupied. But, that will be only the spark of the conflagration, as European markets open, with bond and stock prices already heading sharply downwards. The European banks are today even more shaky than in 2010.

The Syriza government has bent over backwards to accommodate the “institutions”, but those institutions decided instead to go for regime change in Greece, in the hope that, as they did in Italy, they could force the government out, and insert a technocratic government. But, just as they seem to have failed to understand that Greece is not Ireland, and so the austerity measures they proposed could not possibly have worked, without putting in vast amounts of capital, over several years, to create sustainable industries in Greece, so they seem to have failed to understand that Greece is not Italy either. There is no possibility that Greece is simply going to succumb to some kind of bureaucratic transfer of power to a technocratic regime that will inflict even more pain upon its people. The political centre in Greece has gone; it has lost all credibility and support. Syriza was the last hope for a democratic solution to be found.

As I pointed out in the week, it is not just a matter of the €350 billion of sovereign debt that will go bad, when the Greek people vote to reject the institutions further austerity measures – and as Paul Mason says, its inevitable that the Greek people will vote to reject them in the referendum on 5th July – it is the further €350 billion of private debt that will go bad too, debt held mostly by European banks, who themselves, are insolvent.

I've pointed out previously the precarious state of banks in Luxembourg, whose exposure is far greater than was that of the banks in Cyprus, but its not alone. The banks in Malta, and in south-eastern Europe, as well as central and eastern Europe, are in a similarly precarious condition.

On top of that there is the unknown quantity of credit default swaps that will be triggered. Bear in mind that anyone can buy a credit default swap, just like spread betting on a football match, and no one knows how many rich individuals, institutions and so on, will have done so over the last few years, in the belief that ultimately this situation would arise. Good news for those who win that bet, very bad news for all those financial institutions who will be on the wrong side of the trade, bad news for all those unknown counter-parties, who, as 2008 demonstrated, have no idea that they even are a counter party, several times removed, to such a trade.

The cost of avoiding that crash is actually quite small. The institutions could effectively mothball the Greek sovereign debt, as Syriza had proposed. They could ditch austerity, as a policy that has clearly failed, and begin instead to put together a programme of fiscal expansion across Europe, to begin the much needed rejuvenation of infrastructure to make European capital more competitive in the global market. Without that, even if this crisis does not cause a financial crash greater than 2008, it is only a matter of time, before such a crash occurs.

In fact, such a crash would be beneficial to capital. It is ultimately required so that the draining effect of fictitious capital over real capital is ended, and money-capital is once again used for accumulation rather than for speculation. As Marx put it,

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

(Theories Of Surplus Value, Part 2, p 496)

None of this debt in the form of fictitious capital – shares, bonds, property – plays any positive role in capital accumulation. In fact, to the extent that it leads to these kinds of speculative bubbles, it drains potential money capital away from productive investment, and into this speculation. The fall in the value of bonds, shares or the wiping away of trillions of dollars of debt, makes not one jot of difference to the continued productive capacity of the factories, machines and other productive-capital that was previously bought with the loaned money-capital. In fact, to the extent that the firms that utilise this productive-capital thereby pay less in interest, to the owners of the fictitious capital, the more they have available for further investment.

Over the last decade or so, huge amounts of company profits have gone, at the direction of the representatives of the money lenders, to boost share prices, by buying back shares and other such measures. If the prices of shares, and bonds collapse, companies could instead buy back their outstanding shares and bonds, at these cheap prices, so as to rid themselves of the need to pay that interest and dividends.

Similarly, a financial crash, that would inevitably reduce the value of property, would make it once again affordable for people to buy to live in, rather than as yet another vehicle of speculation. It would mean that workers pension contributions would once again buy them the quantity of bonds and shares, required to provide their pension funds with the basis of meeting their future pension requirements. In doing that, it would significantly reduce the value of labour-power, and boost the rate and mass of surplus value, again providing a basis for greater accumulation and expansion.

As Marx puts it,

"... the reduction of the money equivalents of these securities on the stock exchange list has nothing to do with the actual capital which they represent, but very much indeed with the solvency of their owners."

(Capital III, Chapter 30)

But, the conservative governments and parties will do all in their power to avoid such a crash and a destruction of this fictitious capital, despite the beneficial effect it would have for real productive-capital. That is because, despite all of their spin about being “pro-business”, they are nothing of the kind. They are not “pro” the real businesses – the businesses made up of millions of workers, that produce commodities. They are only “pro” the money lending capitalists who leach off those businesses, by drawing off dividends and other forms of interest. That is why, rather than allowing the banks to go bust in 2008, those governments, stepped in to nationalise the banks, to provide them with vast amounts of liquidity, even at the cost of then crippling their economies, and the real productive-capital and businesses as a result of policies of austerity.

As Marx, says, a financial crisis of this kind can have economic consequences, as the financial crisis of 2008 did. Analysing a similar financial crisis in 1847, Marx indicates that a 37% contraction of economic activity followed. But, that was largely due to the fact the financial crisis itself was worsened by the effects of the 1844 Bank Act, which created a credit crunch. Once the Act was suspended, and liquidity was injected into the system, the long wave boom of the time resumed.

Today, governments have every possibility of ensuring that sufficient liquidity is made available to prevent a credit crunch, so that the circulation of commodities can continue unabated, without, as they did in 2008, propping up the banks and the values of fictitious capital. Large companies have unprecedented levels of money hoards, built up as a consequence of the massive rise in the rate and mass of profit over the last 30 years. Apple alone has around $150 billion of cash sitting on its balance sheet. Microsoft has around $75 billion dollars of cash on its balance sheet. At the end of 2013, US non-financial corporations had around $1.5 trillion of cash on their balance sheet.

Globally, around $7 trillion sits on corporate balance sheets. If stock, bond and property prices collapse, this cash will be able to pick up vast swathes of these depreciated assets. It will mean that there will be a huge centralisation of capital, similar to that which occurred at a similar phase of the long wave cycle in the 1960's. A similar process happened after the collapse of the railway bubble in 1847. It would mean a significant strengthening of the power of real productive-capital.

Marx makes this same point about the negative role played by this money-lending capital as against real productive capital. He writes,

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.” 

(Capital III, Chapter 33)

It is those interests, rather than the interests of actual business, or productive-capital that the conservative parties defend; it is those elements which provide the social and ideological basis for those parties. It is social democracy, which represents the true interests of business, i.e. of big industrial capital. Unfortunately, it has been the former rather than the latter that has been in the ascendancy for the last 30 years, which is why the interests of fictitious capital have prevailed over the interests of real productive-capital. But, as Marx demonstrates, economies work according to objective laws, and the contradictions which those laws have built up, as a result of this astronomical accumulation of fictitious capital, have reached their limit.

Given the nature of those conservative forces, the likelihood is they will once again attempt to defy the laws of gravity. The consequence will be the same fate as that which befell humpty dumpty.

Northern Soul Classics - Hope We Have - The Artistics

Monster dancer from the Artistics

Friday, 26 June 2015

Friday Night Disco - Stop On By - Rufus Featuring Chaka Khan

Capital III, Chapter 9 - Part 5

The fact that the cost price of one commodity includes the price of production of those commodities used in its production, and therefore, the profit realised in these prices, does not contradict the statement that the sum of values equals the sum of prices. A's profit will be included in the price charged to B for the raw material supplied to them, just as B's profit will be included in the price of the machine they sell to A. But, neither A nor B count their own profit as part of their own cost price. So, if the total of cost prices were totalled, and the total of profits were totalled, the result would be the total of prices of production.

“There is no difference between surplus-value and profit, as long as, e.g., A's surplus-value passes into B's constant capital. It is, after all, quite immaterial to the value of the commodities, whether the labour contained in them is paid or unpaid. This merely shows that B pays for A's surplus-value. A's surplus-value cannot be entered twice in the total calculation.” (p 161)

The only difference, as pointed out earlier, is that the profit attaching to any particular capital will be bigger or smaller than the surplus value depending upon its organic composition, but also for that same reason, the prices of those commodities that form its constant capital, and that comprise the necessities of its workers – and hence indirectly its variable capital – will also be higher or lower than their exchange value, and so will cause its cost price to be also higher or lower.

“Aside from the fact that the price of a particular product, let us say that of capital B, differs from its value because the surplus-value realised in B may be greater or smaller than the profit added to the price of the products of B, the same circumstance applies also to those commodities which form the constant part of capital B, and indirectly also its variable part, as the labourers' necessities of life. So far as the constant portion is concerned, it is itself equal to the cost-price plus the surplus-value, here therefore equal to cost-price plus profit, and this profit may again be greater or smaller than the surplus-value for which it stands. As for the variable capital, the average daily wage is indeed always equal to the value produced in the number of hours the labourer must work to produce the necessities of life.” (p 161)

So, clearly Marx understood that the values of these input prices also needed to be transformed. The value of those commodities which form the constant capital is the same as previously described. It is the cost-price plus the average profit. But, now this cost-price is not a cost-price determined by exchange value, but a cost price determined by price of production. Consequently, the amount laid out will move up or down according to whether, in the particular case, the price of production, of these inputs, is higher or lower than their exchange value.

“So far as the constant portion is concerned, it is itself equal to the cost-price plus the surplus-value, here therefore equal to cost-price plus profit, and this profit may again be greater or smaller than the surplus-value for which it stands.” (p 161)

Similarly, the value of labour-power is determined by the number of hours labour the worker must work to produce an equal amount of value to cover the cost of the necessities required for their reproduction.

“But this number of hours is in its turn obscured by the deviation of the prices of production of the necessities of life from their values.” (p 161)

If, on the basis of exchange values, the price of bread, clothing, shelter etc. come to £1 per week, then, depending upon the organic composition of the capitals producing these necessities, this might fall to £0.75, or rise to £1.25, for example. In the former case, the value of labour-power would fall, and in the latter it would rise. This, as seen earlier, would not change the value produced by this labour, but it would change the proportion in which the new value created was divided between workers and capital. If prices of production for necessities were overall lower than their exchange values, the value of labour-power would fall, and surplus value would rise, and vice versa. But, this change in the amount and rate of surplus value, would in turn, impact the general rate of profit.

“However, this always resolves itself to one commodity receiving too little of the surplus-value while another receives too much, so that the deviations from the value which are embodied in the prices of production compensate one another. Under capitalist production, the general law acts as the prevailing tendency only in a very complicated and approximate manner, as a never ascertainable average of ceaseless fluctuations.” (p 161)

Thursday, 25 June 2015

Time For Tsipras To Pull The Plug

After five months of being tied into negotiations with the IMF, EU and ECB (the institutions), during which Greece has already made concessions to the demands of these organisations, and during which these organisations have simply ensured that Greece's creditors continued to be paid, and that a new global financial crisis was staved off, for a while longer, its time for Alexis Tsipras and Syriza to pull the plug on further such talks. The Greek government should give “the institutions” a simple ultimatum - “Either agree to the concessions we have already offered, cut the debt, and provide the required short term liquidity by this weekend, or all further talks are off, and we will go into default on 30th June."

The reality of the “support” for Greece that has been provided by the IMF, and ECB, and the previous debt write downs negotiated with the support of the EU, is that they have not been support for Greece at all. They amount to the same kind of support for Greece that things like Housing Benefit, or other in-work benefits provide for underpaid workers. In other words, no support at all. Just as Housing Benefit goes not to the worker as tenant, but to the landlord; just as the various in-work benefits go to enable cheapskate employers to underpay their workers, so the support provided to Greece is really support provided to Greece's creditors.

None of the support provided for Greece, for example, has gone to provide the kind of infrastructure or modernisation of the Greek economy required to enable Greece to pay its way in the world. That would not be so bad, if the EU actually performed the function it should perform, of bringing about an ever closer union, and a convergence of economic conditions within its borders, by organising fiscal transfers to those areas that needed such investment. All of the money that has been put into Greece, has been simply to pay the interest, to creditors, and to enable those creditors to cash in their capital, when Greek sovereign bonds fall due.

Without a deal that cancels the debt, or at least as Syriza had proposed converts the debt into long-term, zero interest bonds, any deal will be unsustainable. In fact, even the IMF has said that a deal that does not reduce the debt is unsustainable. But, the IMF and the other EU and ECB are simply playing a good cop/bad cop routine. The IMF says the debt should be cut, whilst the EU refuses to make any move on that front. At the same time, the IMF rejects Greece's fiscal measures because it relies on what Paul Mason has called “left austerity”, an emphasis on taxes on the rich, rather than on cuts in spending.

But, as Paul has pointed out the IMF has a pretty bad track record, in this regard. Their models are based upon an assumption that a reduction of €1 in the budget causes only a fall of €0.50 in GDP, whereas the evidence is that the fall is more like €1.50. That is why the austerity measures in Greece have already caused a 25% contraction of its economy, and sent the percentage of its debt up rather than down, from around 120% to 180% of GDP. The same thing was seen in the UK after 2010, when the Tories austerity measures caused GDP to tank, and made it impossible for them to fulfil their promise to eliminate the budget deficit. In fact, even though they reduced the deficit, the percentage of debt to GDP on their watch rose from around 40% in 2010, to over 70% in 2015.

It has become obvious that the “institutions” are seeking “regime change”, by using the debt as a political weapon. But it is a double edged sword for them. Yes, a huge amount of Greek public debt, has over the last five years been nationalised. That is various state bodies across Europe have taken it off the hands off private speculators. But, the fact is that if Greece defaults, all of that debt, held as fictitious capital in the shape of bonds etc., by the banks and finance houses will become worthless. It means that all of these worthless assets will then have to be written off as components of the banks' capital, which then limits what the bank can lend to other banks, under international banking regulations. The only alternative is to replenish this bank capital out of taxes, which means that it will be Germany and other northern European countries, within the Eurozone, which will have to stump up the cash one way or another. In fact, in the face of the financial crisis that is likely to follow a Greek default, as was seen in 2008, the amount that they will need to stump up to replenish the devalued fictitious capital is much greater than first appears, and certainly much greater than the cost currently of providing the support that Greece actually needs.

But, secondly, at the moment everyone is discussing only the Greek sovereign debt. That is the debt owed by the government. But, Greek private debt, that is the debt owed by companies, and individuals is around 150% of GDP too. In other words, more or less the same as the sovereign debt. If Greece defaults, and a financial crisis ensues, creditors can say goodbye to this private debt as well – or around a further €360 bn. None of this debt is part of the previous haircuts arranged for the sovereign debt, and by its nature is debt held by various European and global financial institutions. To put this in context, Lehman Brothers, whose collapse was largely seen as the spark for the 2008 financial crisis had debts of around $600 billion, which is less than the total sovereign and private sector Greek debt today.

Moreover, although the talk is of global banks and financial systems being more robust today than in 2008, the opposite is the truth. The problems of 2008 were resolved not by allowing the oceans of fictitious capital to be written down, but by pumping even more liquidity into markets to keep them inflated. European banks today sit on a much larger mountain of assets in property and bonds at vastly inflated prices than they did in 2008. They have only been kept going by an unheard of programme of extend and pretend to prevent debtors from being foreclosed upon, and a fire-sale of properties taking place.

Yesterday, on CNBC, one of today's leading speculators, Carl Icahn, said that the US stock market was greatly overheated, and he made the point I have made here several times in recent weeks, that the bond market, particularly the junk bond market is in a dangerous condition, because not only are bond prices at extremely over extended levels, but like the property market, it is an illiquid market. That is as soon as people begin to sell, they find that there are no potential buyers, so prices move extremely quickly from going up to collapsing. Similarly, the Chinese stock market, which did not move much for several years, whilst other stock markets were soaring, and when its economy was growing more rapidly than anywhere else, is itself now in a bubble, as a result of money printing by the Chinese authorities.  In the last year, it has risen by around 130%, and some analysts are now forecasting a drop of 50%.

The Chinese monetary authorities, in an attempt to keep China's markets inflated, are looking at removing all limits on borrowing, in a move reminiscent of the actions taken in the US and UK, that led to the financial crisis of 2008. The chances of a bigger financial crisis than 2008 are now growing, as I set out in my book. For example, a considerable part of the bubble in London property has come from Chinese speculators, and other speculators from Singapore and Malaysia. If the Chinese asset price bubble bursts, then as happened in 2008, one of the first things will be that all those speculators that have bought on margin, i.e. borrowed to speculate, will have to sell anything and everything in order to get cash to meet their margin calls. In 2008, the signal for that was a sharp fall in the futures price for oil, as banks and financial institutions sold what had been a very profitable asset, in order to simply get cash.

A bursting of the bubble in China, will inevitably see, huge sales of speculative London property. But property like junk bonds is an illiquid asset. Even if you can find a buyer, it takes several weeks for the deal to go through, compared to selling shares, which happens more or less instantly at the click of a mouse button. A collapse in London property prices, will immediately burst the property bubble in the rest of Britain, and affect British banks whose balance sheets are a fiction based upon these massively inflated property values.

So, if the ECB, EU and IMF force a default on Greece, the effect will be pretty immediate and dramatic across Europe, inside and outside the Eurozone, and its unlikely that such an effect will leave Asia and North America untouched.

Moreover, Tsipras has limited options. Putting forward the concessions they have so far made, could be justified, as a means of buying time. Already, in Spain, Podemos has won ground in the regional elections, and there is scope for further advance in the Spanish General Election later in the year. But, that is still months away, and it has to be said that little in the way of an international movement has been built to defend Greece, or to push other European governments towards a more social-democratic position.

Several years ago, I warned that the ideas being put forward by some on the far-left in respect of Greece were dangerous. The idea that a small country like Greece, could escape the laws of economics simply by installing a left-wing government, or even some form of workers government, were utopian. It is the stuff of the Stalinist theory of Socialism in One Country. Such an attempt would lead to economic chaos, leading to social chaos, and inevitably to the introduction of some kind of fascistic, militaristic or Bonapartist regime as has been seen in Greece in the past.

The economic situation of Greece, whoever forms the government, or indeed whoever holds state power (and the two things are not at all the same thing, which is why demands such as “Labour (Syriza) Take The Power”, as some proposed are not only illiterate in Marxist terms, but positively dangerous) cannot be resolved in Greece. Greece's problem comes down to a lack of capital. As Trotsky pointed out, in relation to Mexico, if your intention is even just to build state capitalism, that is impossible without capital, and if you lack it, you have to rely on others to provide it. The problems of Greece, and other peripheral economies can only be resolved as part of a European solution.

The answer for Greece, therefore, cannot be, as the Stalinists and some on the far left are suggesting, for Syriza to nationalise the banks, exit the Euro, and even the EU. For one thing, Syriza is not a revolutionary party, such as the Bolsheviks in 1917. Politically, it is little different from the Labour Government of 1945. In fact, as I said some months ago, what Syriza was asking permission to implement is little different to the kind of counter-cyclical measures that Obama has undertaken in the US since 2008! But, even if Syriza were to try to implement the kind of policies some on the far left are proposing, of economic autarchy and state capitalism, they would necessarily fail both economically and politically.

They would fail economically because Greece is a tiny poor country, whose problems stem precisely from the fact that it lacks capital, and is unable to compete in the world on the basis of the capital it does have. It would fail, for all the reasons Marxists have outlined over the years in relation to “Socialism In One Country”. That also means it would fail politically, therefore. It would fail politically, because Syriza is not geared to implement such a programme. It would split into numerous factions. But, it would fail politically, because Greek society would also split into warring factions, and the most likely winner of such a contest under current conditions would be the fascists or the military.

The institutions, in looking for regime change, do not seem to have recognised that the conditions under which they could do that several years ago in Italy have gone today in Greece. If Syriza falls under such conditions, it will not be a technocratic government that takes its place, it will be anarchy on the streets and a Golden Dawn coup with or without the backing of sections of the military and police. If the institutions want a model of where there programme is driving they should stop thinking about the experience in Italy, and think more of what the actions of Europeans have brought in Libya. Given the huge influx of migrants into Southern Europe from across the Mediterranean, they may want to think about what the spread of those conditions to the other side of the Mediterranean will mean.

As I pointed out months ago, if Syriza is forced to buckle that is what lies in store for Greece. Yet, as set out above, nor can Syriza simply choose to withdraw from the Eurozone and EU, because to do so would equally lead to economic calamity, and almost certainly something similar to the scenario described above, with social chaos and the rise of the fascists. It would yet again, be an opportunity for the right to blame socialists for the crisis, and to emphasise that socialism does not work.

That is why the time has come for Tsipras to pull the plug. Tsipras, Varoufakis and the other Syriza spokepeople are right. There is nothing extreme or unreasonable in what they are asking. If the EU really did want to resolve the problem in Greece, and facilitate a resolution of the wider debt crisis, and sluggish growth they would have agreed to them months ago, along with a similar programme for growth across the EU. As has been said before, in 1945, states avoided the mistakes of the Versailles Peace, by cancelling Germany's debts, and introducing the Marshall Plan of Keynesian fiscal stimulus and investment across Europe. Today, it appears that the EU leaders have reverted to the mistakes of Versailles in 1918.

The reason for that has also been set out here over the last few years. It is that the EU itself is suffering not from an economic crisis, but from a political crisis. If the EU truly were a state, the current situation would not arise. The political crisis arises because what are still nation states operating within its boundaries continue to have powerful national forces, which insist upon the furtherance of national interests over the interests of the EU as a whole. Cameron and the Tories are a classic illustration of that, but Merkel faces similar problems from her own conservative voters. Until such time as a United States of Europe is created, these kinds of political crises will continue to erupt within the EU, and they will continue thereby to cause, financial and economic crises.

One hopes that Syriza have been drawing up plans for what to do if they were forced into a default. I have suggested some of the measures they could adopt in that vein, by continuing to denominate their prices in Euros, whilst creating electronic Euro deposits to finance the state's expenditure, which would thereby also put deposits into the accounts of its employees and so on. But, Syriza should have other plans.

The government has been taking measures that meet some of its social promises; it has made reforms in relation to the police and so on, as Paul Mason has described in his reports. But, there are many more things it could do, in the immediate aftermath of a default. Greece still has a large military budget, as a member of NATO. A first move would be to withdraw from NATO, and to begin selling off the large amounts of heavy military equipment it possesses. They may want to consider an international auction for use of the military and naval bases to the highest bidder. They could no doubt get quite sizeable bids from either Russia or China.

As part of that process, they should follow the lead of countries like Switzerland, that rely upon a citizen's militia rather than a standing army. In fact, Engels proposed that every country should institute universal military conscription as a necessary concomitant of universal suffrage. The only way a people can enforce the electoral choices they make, he argued, is if they are themselves armed to prevent those choices being frustrated. The right to bear arms as part of a well regulated militia is also a fundamental aspect of the US Constitution. Greece could save a large amount by disbanding its armed forces, and paying all of its citizens as part of a citizen militia, under democratic control. That is also a fundamental protection against a coup by the fascists or sections of the state.

One of the other measures that creditors are trying to impose on Greece is the privatisation of state assets. To pre-empt that Syriza should encourage the workers of all state industries to take them over and run them as co-operatives. The government should encourage such action by declaring that it will sell these assets to the workers at a nominal price. With the banks, the government should establish a “bad bank”, as was done in Spain, for example. All bad loans, should be transferred from other banks to this bad bank. The workers of the other banks should then be encouraged to take them over and run them as worker co-operatives, with encouragement for all these banks, then to form one single worker owned co-operative bank.

At the same time as giving its ultimatum to the institutions, Syriza should also announce that it intends to call new elections. That would signal its seriousness about ending all future negotiations after this weekend. Syriza's message then would be quite clear:
  1. We stood as a social-democratic party intent on resolving the problems of Greece within the confines of the EU and capitalism. The Greek voters voted for us on that basis.
  2. The EU, ECB and IMF have made fulfilment of our electoral programme impossible.
  3. We are not prepared to implement the programme of austerity that the institutions are demanding, and so we are standing down from government.
  4. If you elect us on the programme we are now putting forward to you, we will only take office if a large majority of the Greek population give us their support.
  5. Our programme can only be implemented with your support and the support of workers across Europe.
  6. If we do not form the next government, we will continue to resolutely oppose any measures that the government tries to impose upon the Greek people that are against their interests.
On this basis, the battle lines would be clearly drawn, and the institutions would then go into collapsing the Greek economy in the full knowledge of what they would be unleashing. It would have several advantages. Until now, Syriza have not had to impose any additional austerity measures on the Greek people. It is still seen by the vast majority as having tried to prevent the imposition of any such measures. Unlike other social-democratic parties such as PASOK, or those in Spain, Portugal and Italy, therefore, its hands would remain clean. In the meantime it would have brought about some of the other social changes it promised, which put the Greek workers in a stronger position.

I opposed the line taken by the CPGB some time ago that Syriza should not have taken office. I think their position did not make sense. If a social-democratic party like Syriza stands in elections, wins an electoral majority (or as near as dammit) what message would it send to workers if it failed then to take office. It would be like Attlee, refusing to take office in 1945, because he did not believe he could legislate socialism! It confuses the position of a social-democratic party taking governmental office, with the position of a revolutionary party seizing state power.

But, there is a tactical reason to take office for socialists. It is to demonstrate the difference between them and other bourgeois politicians, as well as to demonstrate the real limitation of what is possible without state power, and within the confines of a single state. In the 1980's, one of the tactics proposed by socialists in relation to local councils facing cuts was that of resignation. It meant that socialists in control of a council could go to the limit of mobilising opposition to the cuts, but, in the absence of a larger national mobilisation of the working-class, which would have meant they could confront the state, they could instead make a point about the limitations of their electoral power and resign rather than implement attacks on the workers. They could then continue to oppose the cuts from opposition, voting against any budget put forward by what would then be a minority administration.

It is rather like the militant shop steward, who does everything in their power to mobilise the membership to oppose the attacks of management, rather than simply resigning themselves to what appears to be the current apathy and weakness of the majority of the workforce, and yet having done so, has to advise those members that they are not in a position to win.

Syriza has shown they are prepared to fight in a way that other social-democrats have not. But, to win we need to build a much larger, much stronger movement across the EU.

Capital III, Chapter 9 - Part 4

What is important for Marx, at this stage, is not the resolution of some esoteric, mathematical problem, but the explication of an historical process in its simplest form. Having achieved that, it is then possible, at some future point, to elaborate it in its phenomenal form. But, in fact, on the basis of what has already been said, the difficulty of resolving the Transformation Problem, by some mathematical formulae can be seen. Not only does a resolution require a knowledge of the elasticity of demand for each commodity, but we know that as the magnitude of capital increases, so the organic composition tends to increase with it. Consequently, alongside the process that reduces prices and profits for yarn producers – the increase in supply – goes another process, whereby the organic composition of capital rises, and so the rate of profit is further reduced. Yet, this process itself is further complicated.

The process by which capital invaded the spinning of yarn went through a number of stages. Even at the level of manufacture, the organic composition rises, simply because co-operative labour is inherently more efficient, and so it processes more cotton. But, by the same token, this very process means that productivity rises, and so does the extraction of relative surplus value. So, the rate of profit is being continually pulled down by one cause, and yet driven up by another related cause.

Its no wonder that at this stage, Marx wanted to keep the explanation of this process at as simple a level as possible. So, Marx is speaking of an actual historical process rather than just a logical sequence when he writes,

“Accordingly, the rates of profit prevailing in the various branches of production are originally very different. These different rates of profit are equalized by competition to a single general rate of profit, which is the average of all these different rates of profit.” (p 158)

Wednesday, 24 June 2015

Capital III, Chapter 9 - Part 3

As Engels points out, therefore, the resolution of the Transformation Problem can then never be a simple matter of a mathematical formula, by which an average rate of profit is simply added to existing cost prices, be those cost-prices themselves determined by exchange values, or prices of production.

“Schmidt strayed into this bypath when quite close to the solution, because he believed that he needed nothing short of a mathematical formula to demonstrate the conformance of the average price of every individual commodity with the law of value.” (p 13)

“Sombart, as well as Schmidt, — I mention the illustrious Loria merely as an amusing vulgar-economist foil — does not make sufficient allowance for the fact that we are dealing here not only with a purely logical process, but with a historical process, and its explanatory reflection in thought, the logical pursuance of its inner connections.” (The Law Of Value and Rate of Profit, p 895)

Resolution of the transformation of exchange-values into prices of production is a lengthy and continuous process, which also involves the movement of capital from one sphere to another. A mathematical formula may be an approximation of the equilibrium market prices, that may result, at the end of that process, but it can never describe the actual process itself. For example, to know how much capital needs to move from sphere A to sphere B, to equalise profits, it is necessary to know how demand will react to any change in price. In other words, we need to know the price elasticity of demand in each sphere.

Suppose sphere A has a below average organic composition, and B above average. Capital moves from B to A. The price of A commodities falls. However, the elasticity of demand for A is high. As prices fall, demand rises sharply, soaking up the additional supply. Prices and profits remain higher than B. So, increasingly more capital has to move to A until a point is reached where elasticity falls, and demand no longer rises sharply with every fall in price. The consequence is that large amounts of capital have had to be removed from production of B before profit rates are equalised.

By contrast, if demand for A is inelastic, any fall in price will have little effect on increasing demand. A relatively small increase in supply will create the required fall in price to equalise profits, and so less capital will need to be withdrawn from B. That is part of the weakness of Marx’s presentation here. He says,

“Let us assume that the five different investments I to V of the foregoing illustration belong to one man.” (p 159)

He then goes on to describe how, for each of these capitals, the constant and variable capital would be known, and thereby the cost prices of each commodity. The owner would have to set the market prices of each commodity according to these cost-prices, because, at minimum, the market price must recover the cost of the capital consumed in production.

“But as regards the different quantities of surplus-value, or profit, produced by I to V, they might easily be regarded by the capitalist as profit on his advanced aggregate capital, so that each 100 units would get their definite aliquot part. Hence, the cost-prices of the commodities produced in the various departments I to V would be different; but that portion of their selling price derived from the profit added per 100 capital would be the same for all these commodities. The aggregate price of the commodities I to V would therefore equal their aggregate value, i. e., the sum of the cost-prices I to V plus the sum of the surplus-values, or profits, produced in I to V. It would hence actually be the money-expression of the total quantity of past and newly applied labour incorporated in commodities I to V. And in the same way the sum of the prices of production of all commodities produced in society — the totality of all branches of production — is equal to the sum of their values.” (p 159-60)

However, on the basis that I previously set out, its clear why this is simply not possible. If we take Department V, from Marx’s example, the exchange value of this commodity is indicated as 20. If we assume that on the basis of exchange values, demand and supply for V are in equilibrium at this price, then any variation from it must disturb that equilibrium. In fact, the price of production is indicated as 37, an almost doubling of the price. Consequently, the owner of this business could try to share out his overall profit, by increasing the market price of V in this way, but it would inevitably fail, because at this price, demand would likely collapse, and they would be left with large amounts of unsold production.

Similarly, with commodity III, if he reduces its price from 131 to 113, he will find that demand rises way above his output. The only way this could be resolved is by reducing the supply of V, and increasing the supply of III, with a consequent shift of capital from one sphere to the other.

In fact, Marx realised this, and in his historical explication of the process, he describes precisely this shift of capital from one sphere to another, and he also refers to the issue of demand elasticity. But, he does not incorporate it into his models. That is consistent with Marx's method, whereby he sets out the bare bones of a process, to highlight the main features, and then builds up the complexity around that skeleton, to bring it closer to reality.  He intended to deal with all of these factors, like demand elasticity and so on later, in his analysis of competition.  Similarly, he also understood that it was necessary to transform input prices simultaneously with output prices, because the latter, at the same time, comprise the former for some other capital. Yet, he did not do so, instead for now just noting the requirement to do so.

“We had originally assumed that the cost-price of a commodity equalled the value of the commodities consumed in its production. But for the buyer the price of production of a specific commodity is its cost-price, and may thus pass as cost-price into the prices of other commodities. Since the price of production may differ from the value of a commodity, it follows that the cost-price of a commodity containing this price of production of another commodity may also stand above or below that portion of its total value derived from the value of the means of production consumed by it. It is necessary to remember this modified significance of the cost-price, and to bear in mind that there is always the possibility of an error if the cost-price of a commodity in any particular sphere is identified with the value of the means of production consumed by it. Our present analysis does not necessitate a closer examination of this point.” (p 164-5)

In other words, if A is an input for B, the exchange value of A might be 100, whilst its price of production might be 50. But, when the producer of B, purchases A as an input, they buy it at its price of production, not its exchange value. For B, the price of production of A, is now its cost-price. If previously we had two firms, one capitalist, and one non-capitalist, so that A's output is priced as price of production, and B's is not:-


c 30 +v 10 + s 60; C = 40, s' = 600%, r' = 150% 


c 100 + v 10 + 10; C = 110, s' = 100%, r' = 9.1%

we would now have

c 30 + v 10 + p 10 = 50; C = 40, r' = 25%


c 50 + v 10 + p 10 = 70; C = 60, p' = 16.6%

So, although B is not a capitalist firm, and its commodity is not priced in terms of a price of production, because it does not take part in the sharing out of the total surplus value, the price of its commodity is still affected by the fact that the producer of its input A is a capitalist firm, and the price of A's output falls, as a price of production, compared to its previous price, determined by exchange value. The price of B now falls from 120 to 70, as a result of the fall in the price of input A. Even though, B as a non-capitalist producer does not share in the total surplus value, and its output is not priced as a price of production, the rate of profit for B is still affected by this change. It rises from 9.1% to 16.6%, simply because its advanced “capital” has fallen from 110 to 60.

This is consistent with Marx's historical-logical method. If we consider yarn production, for a long time capitalist producers of yarn would have been able to take advantage of high market prices, determined on the basis of exchange value, to make high profits, because non-capitalist production remained dominant and determined market prices. Weavers would continue to buy yarn at that price, and it would continue to appear in their cost-price accordingly. It is only as capitalist production of yarn increases that the market price falls below the exchange value, as supply exceeds demand at the old price. At this new market price not only does demand for yarn rise, but this new market price becomes itself a component of the cost-price of the weaver, so the price of woven cloth falls, stimulating a rise in demand for cloth.