Sunday, 22 October 2017

Theories of Surplus Value, Part II, Chapter 8 - Part 55

Marx's exposition in this section is hard to follow, both because of the use of imperial measures and non-decimal currency, and because it is set out as a narrative without tables, and within the narrative, terms such as “worst previous” become indecipherable, as additional types of land are included. Fortunately, most of this exposition duplicates Marx's analysis of rent in Capital III, and I have previously set it out in extensive tables there. I will attempt to make a similar presentation here.

Marx assumes a situation where there are four types of rent producing land. Each type of land is 20% more fertile than the next, and produces 20% more rent. Land type I', does not pay differential rent, but pays absolute rent of £100.

Type
Capital
£'s
Output
Kilos
Rent
£'s
I'
1000
1000.00
100.00
I
1000
1200.00
120.00
II
1000
1440.00
144.00
III
1000
1728.00
172.80
IV
1000
2073.60
207.36

If we take rent to actually be equal to surplus profit, we would have, assuming a 10% rate of profit, and a market value of £1.20 per kilo.

Type
Capital
£'s
Output
Kilos
Price of Production
£'s
Value
Rent
£'s
I'
1000
1000.00
1100.00
1200.00
100.00
I
1000
1200.00
1100.00
1440.00
340.00
II
1000
1440.00
1100.00
1728.00
628.00
III
1000
1728.00
1100.00
2073.60
973.60
IV
1000
2073.60
1100.00
2488.32
1388.32

The rent produced by each type of land is then not determined by its own absolute fertility but by the relative fertility. If more fertile land becomes even more fertile that reduces the rent from less fertile lands, because the surplus profit they produce falls, as the price of production falls.

“Accordingly, Storch’s law is valid here, namely, that the rent of the most fertile land determines the rent of the last land to yield any rent at all, and therefore also the difference between the land which yields the undifferentiated rent and that which yields no rent at all.” (p 99)

The other situation where the previous worst land, I, could produce rent is where the value of the product of lands I-IV is equal to the price of production of the output of the new land I', which is itself below the value of the output. In other words, wherever the value of the output of land I is greater than the price of production for I'.

“If the value is above the average price, then there is an excess profit above the average profit, hence the possibility of a rent.” (p 100)

Saturday, 21 October 2017

Theories of Surplus Value, Part II, Chapter 8 - Part 54

Marx then sets out two situations where this worst land would yield rent. Marx here begins an analysis of absolute and differential rent, and their interaction. His initial calculations are based on a proportional relation of rent to fertility, which he modifies in subsequent examples.

Marx does not make clear the payment of absolute rent as opposed to differential rent in this passage. The basis of absolute rent is the lower organic composition of capital in agriculture relative to manufacturing industry, which means, in aggregate, agricultural exchange-values exceed prices of production. That determines the level of absolute rent with differential rent being levied on top of it.

The value of wheat produced on the previous worst land, was £1200 for 3600 kilos = £0.333 per kilo. It previously produced no differential rent, but only absolute rent. If with the new production, the value of a kilo of wheat is higher than £0.333 per kilo, which is the price of production for wheat on the new worst land, that would require that all the other land was proportionally less fertile.

Its not the low fertility of the new worst land which explains why it pays rent, but the relatively higher fertility of the other lands. In other words, its not absolute fertility that determines rent, but relative fertility.

The previous worst land paid absolute rent, not differential rent, and that it didn't pay more rent, was due to the fact that other land was relatively more fertile compared to it.

Northern Soul Classics - The Girl Across The Street - Moses Smith


Friday, 20 October 2017

Friday Night Disco - Woolly Bully - Sam The Sham & The Pharaohs

Merkel and May

Theresa May's supporters have been presenting the comments of Angela Merkel, that she wants to be able to do a trade deal with Britain, and the decision of the EU Council to start internal discussions on the kind of deal they might offer, as some kind of success. It is simply an indication of the extent to which their desperation is leading them into further self-delusion.

Merkel and other EU Ministers have simply cut off the potential for the Tory party's Loony Right being able to claim that the EU was being obstructive, and thereby pushing May into breaking off talks and pushing a sharp, hard Brexit. It has helped to isolate the hard Brexiters, but with Corbyn and Co also in Brussels, it is also increasing the pressure for May and the Tory soft Brexiters to come to some kind of a deal with Labour. It is an indication of the EU politicians, as they have been all along, being several moves ahead of the hapless Brexiteers.

The EU, as expected said that not enough progress had been made on the first stage talks to justify moving on to trade talks. Whilst Merkel, Tusk and others played good cop, holding out an olive branch to May, Juncker played bad copy, saying that he would have used the word “deadlocked” four times, as opposed to Barnier's use of the term three times. The fact is that there is a logjam, and it is is of the British government's making. It is still hard to see how the UK negotiators can get out out of it, and this is the easy bit of the negotiations. The difficulties are both political and technical for the UK politicians.

The Finances

Britain has tried to muddy the waters in relation to the financial settlement. It comes down to this. Imagine that a couple decide to divorce. In the previous years they have agreed to have a family, and now have three kids, and they have also agreed to send the kids to a fee paying school. They have also bought a house, and taken out a thirty year mortgage to pay for it. Now as they divorce, they are to sell the house. But, they are in negative equity. It is quite reasonable, that both parties are required to share the cost of covering the mortgage debt that exceeds the market price obtained in the sale of the house. And, the fact that one parent has custody of the kids does not excuse the other parent from having to meet their commitments to covering the cost of bringing up the kids, and paying their school fees for the next ten years and so on.

What the Tories are trying to do is to get out of the cost of paying for the kids upbringing, on the basis that they do not have custody, and they are trying to deny any liability for the mortgage debt outstanding. What Theresa may offered in her Florence speech was to pay €20 billion, to cover expenses up to 2020. In effect, she is only offering to pay what would in any case be the membership fees for that period, when she is trying to obtain a transitional membership of the customs union and single market. Its as though, during the divorce proceedings, she is saying she will stay in the house, and pay her half of the monthly mortgage payment, and the school fees.

But, that does not begin to address the longer term financial commitments that have to be resolved, such as the costs of EU civil servants pensions, and so on, which extend decades into the future. The Tories repeatedly talk in bland terms of meeting their commitments, but without nailing down the definitions of exactly what those commitments are, such statements are meaningless. May knows that technically this is easy to resolve. It is simply a matter of nailing down those commitments, and agreeing to cough up what Britain owes. Ultimately, whether Britain pays €20 billion or €100 billion is irrelevant, because for a $2 trillion economy, either sum is peanuts in the grand scheme of things, especially as the latter would almost certainly be paid in stages. The idea that this is a stumbling block or the main issue for the EU is also silly, because for a $14 trillion EU economy, the sums are even more trivial.
The problem is political. The EU cannot allow Britain to get away without meeting its commitments, because that would send very bad signals, but more importantly it has no need to do so. It is the EU in the driving sat, and it is the UK that triggered Article 50. The problem for May is that if she agrees to pay what Britain owes, she will face a revolt from her Loony Right, and may have to rely on support from Labour to face them down. But, in many ways the question of the money is the easiest to resolve.

EU Citizens in Britain

The issue of EU citizens living in Britain should also be easy to resolve technically. All it requires is for those citizens to be granted the same rights they have now, and for a reciprocal arrangement for UK citizens living in the EU. The cost of doing that is pretty minimal. In fact, given that those EU workers make a net contribution to the British economy, not doing so represents a cost. But, again the problem is political. Firstly, a large core of the 37% who voted for Brexit is accounted for by that 25% of the population that self-describes itself as racist. Recent vox pops, show a significant number of these bigots, particularly amongst the older sections of the population, who not only want to stop further immigration, but who want to send existing EU citizens back home.

There has been a notable increase in xenophobic attacks since the Brexit vote, and it is not surprising, therefore, that EU politicians are keen to ensure that the three million EU citizens living in Britain have the protection of the European Court of Justice behind them. Many of those citizens when they have come to apply for UK citizenship have found that their path has been obstructed, not least by the 84 page application form they have to fill in to do so. But, a main bugbear for the Tory Loony Right has always been the ECJ, and they are determined not to allow it any jurisdiction.

Ireland

Politically, the question of Ireland is the easiest to resolve, because on all sides there is agreement that the foundations of the Good Friday Agreement should not be imperilled, and that there should be no return to any kind of border between the North and the Republic. The problem is that this is technically impossible to achieve on the basis of the conditions that the Tories have already set down. From the beginning Theresa May has said that Britain is not only leaving the EU, but is also leaving the single market and the customs union. But, if you leave the customs union, then that means that there has to be a customs border between the EU and Britain. That means a border between Northern Ireland and the Republic, and a border between Gibraltar and Spain. That is a contradiction in aims that cannot be bridged.

Britain has said that in order to resolve this issue its necessary to couple it with the stage 2 trade talks. If as part of its aims in those trade talks, Britain was proposing to remain in the customs union that would be a valid argument, but Britain has already said that its aim is to be outside the customs union. If Britain is outside the customs union, no amount of discussion on future trade arrangements can overcome the requirement for a border. The only alternative would be if the EU allowed Britain to be outside the customs union and single market, and yet to still have free access to those institutions. That, obviously is what Britain wants to achieve, and is the reason it has tried to tie the two things together at this stage, but it is impossible to have your cake and eat it in this way. There is absolutely no way that the EU can allow the UK to be outside the single market and customs union, to make no contribution to those organisations, and also thereby to be free to make its own trade deals with other countries, and yet still have access to the single market and customs union, as though it were still a member. For the EU to do that would be to sign its own death warrant. It makes no more sense than for a trades union to give preferential treatment to non-members as opposed to members.

If Britain wants to have no border between Northern Ireland and the Republic and between Spain and Gibralatar, it has to agree to remain inside the customs union. But, then May will not be able to sell that to her Loony backbenchers. If Britain is outside the customs union then there has to be a border between Spain and Gibraltar and between Northern Ireland and the Republic. Its not just a question of the goods moving backwards and forwards across the border. In Ireland, any such border will quickly result in a return of the rampant smuggling that characterised the past. Many of those engaged in that smuggling are parts of sectarian gangs, and it will not take long for the more extreme of those to use the finances raised by such activities to resume the violent conflict of the past.

On top of that, EU citizens will be free to fly into the republic, and then to simply walk across the border into the North, and from there they can simply cross into the UK mainland. Any idea the Brexiters might have of reducing immigration, would, thereby go out of the door on day one. Britain outside the single market and customs union is simply incompatible with the idea of there being no border between the Republic and the North of Ireland, or between Spain and Gibraltar.

So, although the EU has given Britain more time to resolve these irreconcilable contradictions, its unlikely they will do so, and even less likely they will do so by Christmas. The idea that even if stage 2 talks started in January a trade deal could be agreed by next October is ridiculous, because those negotiations will be even more difficult than the current ones. What the EU have also done is to give businesses in Britain time to start making preparations for moving out, rather than facing a sudden cliff edge if the Tory Loonies had forced a walk-out. Many of those businesses have already said that December was a cut-off for them.

It makes sense for the big banks to start to move their operations to Frankfurt where the ECB is based. Lloyd Blankfein of Goldman Sachs has already been tweeting to that effect. The UK economy already facing rising inflation as the value of the Pound erodes due to Brexit, and facing increasing stagnation as its productivity slows, and businesses fail to invest due to Brexit induced uncertainty is set for a tough time, with no end to it in sight.

Labour would do well to create clear blue water between it and the Tories and the Brexit chaos they are bringing about. Now is the time for Labour to set out clearly just what a mistake Brexit is, and just how much people were deliberately misled by people such as Farage, Trump, Johnson and co. Labour should commit itself to a clear opposition to Brexit, and begin campaigning for Article 50 to be revoked, before it is too late.

Theories of Surplus Value, Part II, Chapter 8 - Part 53

Even where no rent exists economically, i.e. there is no surplus profit, the landlord will not allow the land to be used for free. They will charge a rent. The rent then reduces the tenant's profit below the average, and where the tenant is a peasant producer, it may even eat into their wages. Similarly, a capitalist tenant, whose profit is reduced below the average, by such a lease-rent, may seek to compensate by reducing wages.

In areas such as the United States, where vast areas of land existed, which had not become private property, workers who had emigrated to the continent were able to acquire land, and turn themselves back into peasant producers. Their production was usually inefficient, despite the fertility of the land, because they lacked capital. The organic composition of capital was low, depending on large amounts of manual labour, relative to constant capital. So, the value of production was high. But, surplus profits did not exist for the same reason as in other industries. That is additional capital, in the shape of more workers, was constantly able to acquire land, and increase the supply of agricultural products. So, the market price of agricultural products was forced down, no surplus profit existed, and so no basis for rent to be formed existed.

“But in countries where landed property exists, the same situation, namely that the last cultivated land pays no rent, may also occur for the reverse reasons.” (p 97)

It requires that the fertility of the last cultivated land is so low that the output only generates enough return, at the market price of grain, so as to only produce the average profit.

Suppose £1,000 is invested and produces an output of 3600 kilos with an exchange-value of £1200. The price per kilo is £0.33. There is a 6 day week, and 12 hour working day. A week's labour equals £10. One day's labour is then equal to £1.67. £1,000 then equals 100 weeks labour, and £1200, 120 week's labour.

Ten kilos of grain has a value of £3.33, which is equal to 2 day's labour. Of the 2 day's labour, 20% is unpaid labour, or £0.67.

If average profit is 10%, then on the £1,000 of capital advanced, the price of production for the 3600 kilos is £1,100, which is £0.31 per kilo.

The value of the output is then £100 above the price of production, which is then surplus profit,, appropriated as rent. Rent then constitutes half the surplus value on this production. More fertile lands would produce greater output for the same £1,000 of capital, and would thereby produce more rent.

Now, if another piece of land is cultivated, which only produces 3500 kilos of grain with the same expenditure of 120 weeks of labour, at £3.333 pre kilo, it will only return £1100.But, 10 kilos is now equal to 2.18 days of labour, whereas previously it was only equal to 2 days labour.

The price of production for the 3300 kilos is £1 per kilo. The price of production for the output is £1100, but the value of output is £1200. If it sells its output at £0.333, it will sell it below its value, but at its price of production. So, there would be no surplus profit, or basis for rent.

Thursday, 19 October 2017

The Number of UK Wage Slaves Rises

At Prime Minister's Questions, yesterday, Theresa May opened her remarks by associating herself with opposition to slavery, and its persistence into the modern world. She did not seem to recognise the irony of almost immediately going on to welcome, and indeed praise the role of her government in facilitating, the fact that the latest employment data shows that the number of UK wage slaves has again risen. Everyone understands that those who benefit from more slaves being put to work are the slave-owners, who appropriate the surplus product produced by the slave, yet, the Tories continually expect us to bow down in gratitude that more wage slaves have been employed, in order for those wage slaves to produce a larger surplus product, and surplus value, for a handful of very rich capitalists. The irony of May's statements would not have been missed by economists, and MP's, such as David Ricardo, in the 19th century. Ricardo recognised that being a wage slave was a misfortune that as few people should be subjected to as possible.

The irony would also not have been lost on the author of “Black Swans”, Nicholas Nassim Taleb, who wrote in his book, “The Bed of Procrustes”,

“Karl Marx, a visionary, figured out that you can control a slave much better by convincing him he is an employee.” 

Adam Smith, following on from the Physiocrats, had recognised that value is labour, and that in all modes of production, other than the most primitive, the producers (workers) produce a greater quantity of new value by their labour than is required for the reproduction of their own labour-power, and physically this is reflected by the fact that they thereby produce a surplus product. For so long as these producers owned their own means of production, they were able to appropriate this surplus product/value themselves. It is what led Smith to understand the law of value as being one in which not only is the value of a commodity equal to the labour-time required for its production, but it is also equal to the amount of labour it can command. In other words, a peasant producer of a metre of linen that has a value of 10 hours of labour, can thereby exchange the metre of linen for other commodities with a value equal to 10 hours of labour, and thereby has command over this equal amount of labour used to produce say beer, or bibles.

However, Smith recognised that as soon as a small number of people in society are able to monopolise ownership of either land, or means of production, this law of value appears to break down, because it then becomes obvious that this small group of people is able to command labour for which they have given no equal amount of value/labour, in return. As soon as this situation arises, the owners of this land or means of production, are able to appropriate themselves the surplus labour/product of the producers, just as surely as is the slave owner who directly appropriates the surplus product created by the slave. This situation confused Smith, because he did not distinguish between the value created by labour, and the value of labour-power itself, and the fact that it is precisely because, under capitalism, the producer/worker, sells their labour-power as a commodity, and thereby becomes a wage slave, that the law of value by which the value of commodities is determined by the labour required for their production continues to operate, and yet the capitalist is able to get something for nothing, that the commodities in their possession commands a greater quantity of labour, than is required for their own production.

The reason for this is precisely because these commodities, wage goods, in the possession of the capitalist, do not act as commodities, but as capital. The capitalist only exchanges these commodities, that comprise their variable-capital, or their money equivalent, wages, with the worker on condition that the worker provides more labour, and thereby creates more new value, than those commodities themselves require for their production. In short, if the total economy were viewed, the producers/workers create a quantity of products that are immediately appropriated by capital, and capital only gives back a proportion of those products to the workers, just as the slave owner only gives back to the slave those things required for their subsistence, and capital then directly appropriates the surplus product/surplus value. The tiny number of owners of capital, thereby, can use this surplus product/value to create a lavish lifestyle for themselves as well as to use it to create more capital, and thereby to increase their command over labour, and ensure their ability to appropriate even more profits in future. It is this extension of wage slavery, and exploitation that Theresa May, and the Tories expect us to show our gratitude for!

Adam Smith recognised that the landed aristocracy was able to appropriate the surplus product produced by peasants simply as a result of the fact that their ancestors had been effective murderers and cutthroats, who had built up their ownership of landed property, throughout Europe, and that, on the basis of this ownership, they were able to demand that the surplus product that the peasant producers would previously have owned themselves, was paid, instead, as rent, to the landowner. It was why Smith was scathing of such parasitic elements in society such as the aristocracy, the clergy etc. Smith also recognised that it was the fact that the means of production had been monopolised by a small group of capitalists, and that as capitalist production replaced peasant production, and the old guild production, the labourers could only work, if they had access to these means of production.

It was the fact that there were many labourers seeking work, but a relative shortage of capital, which Smith believed explained the breakdown of the law of value, so that the owners of capital were able to command a greater quantity of labour with the commodities in their possession, than was represented by the value of those commodities. In other words, Smith believed that the law of value broke down because the relative oversupply of labour, pushed down its price, whilst the relative shortage of capital pushed up its price. Writing near the dawn of this capitalist production, Smith saw the rapid accumulation of capital, and the rapid growth in the number of people who were themselves becoming capitalists. On this basis, Smith mistakenly believed that this relative imbalance in the supply of labour and capital would be resolved, as the supply of capital was thereby increased, and the demand for labour increased along with it. The result would be that the ability of capital to appropriate the surplus value created by labour would then be diminished, so that the mass and rate of profit would continually be squeezed. 

This was Smith's explanation for the historical tendency for the rate of profit to fall, and he saw it as inevitably leading to a crisis for capitalism, as eventually the profit would disappear altogether. He was wrong, as Marx describes.

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

(Theories of Surplus Value, Chapter 17, Footnote 1)

Marx recognised that although, there are indeed times when capital accumulates rapidly so that the demand for labour-power rises, pushing up wages, and squeezing profits, it is the very fact that capital will only employ wage slaves when those wage slaves hand over a portion of their labour gratis that ensures that this cannot be a permanent situation. It only arises exceptionally, although periodically, in temporary crises of overproduction. The response of capital to such situations is always to create for itself a relative surplus population, and it does this by investing in the development of new labour-saving technologies, so that the existing output can be produced with less labour, and increased output with the same amount of labour, so that the relative shortage of labour-power is overcome, wages are pushed down, and the rate of exploitation thereby pushed up.

As Marx puts it,

“Take, for example, the rise in England of agricultural wages from 1849 to 1859. What was its consequence? The farmers could not, as our friend Weston would have advised them, raise the value of wheat, nor even its market prices. They had, on the contrary, to submit to their fall. But during these eleven years they introduced machinery of all sorts, adopted more scientific methods, converted part of arable land into pasture, increased the size of farms, and with this the scale of production, and by these and other processes diminishing the demand for labour by increasing its productive power, made the agricultural population again relatively redundant. This is the general method in which a reaction, quicker or slower, of capital against a rise of wages takes place in old, settled countries. Ricardo has justly remarked that machinery is in constant competition with labour, and can often be only introduced when the price of labour has reached a certain height, but the appliance of machinery is but one of the many methods for increasing the productive powers of labour. The very same development which makes common labour relatively redundant simplifies, on the other hand, skilled labour, and thus depreciates it.”

(Value, Price and Profit) 

Rather than the amount of profit falling, as Smith believed, therefore, it is actually increased. Yet, as Marx also describes, it is these measures to overcome the crisis of overproduction, which then lead to the tendency for the rate of profit to fall, that Smith, and other economists had been struggling to explain. That is because, this rise in productivity means that more material is processed by the same amount of labour, which in turn means that the proportion of the value of the final output accounted for by material rises, whilst that of labour (divided into wages and profits) falls. This tendency for the rate of profit to fall, therefore, does not, as Smith and others believed, represent some existential threat to the system, but on the contrary, is the manifestation of its ability to continually overcome these periodic crises of overproduction, to raise productivity, and with it the mass of profit, and thereby to continue its upward path. It represents not an indication of decay, but of continued vibrancy, of the ability to continually be able to revolutionise the means and methods of production, so as to overcome those temporary shortages of labour.

If anything, therefore, the rise in UK employment of wage slaves, and fall in unemployment should be seen as a bad thing, when combined with the further fact that UK productivity has not just slowed, but is now falling, and with the fact that the wages of British workers are lower today, in real terms than they were ten years ago. It indicates that UK capital is suffering from decay, and a failure to revolutionise the means and methods of production, so as to increase the mass of profits via greater efficiency. Instead, it is relying on maintaining its existing levels of profits by reducing wages, and forcing workers thereby to sustain their level of subsistence by increasing resort to debt, not to mention the resort to food banks, and other forms of charity, reminiscent of the 19th century, and the novels of Charles Dickens.

The critique of the bourgeois-liberal view of the freedom of the labourer was also indicated by Linguet. Ricardo pointed out that it is better for a society to have only 200 labourers who are productive enough to be able to support a population of 300, than to have a society of 300 labourers that are able to support a population of 400. The gross product is greater in the latter case, but its net product, i.e. the product left over after the consumption of the labourers has been met, is only 33.3%, whereas in the former case, although the gross product is 25% less, the net product is 50%. Ricardo argued that the fate of the productive labourer is to produce a surplus product and surplus value always for someone else, and so the number of people placed in this unfortunate position should be kept to a minimum.

The Tories have tried to deflect criticism of the fact that real wages are lower today than ten years ago, by talking about the cuts in income tax, but those tax cuts primarily benefit those on higher incomes. Moreover, whilst they mention the raising of income tax thresholds, they fail to mention that, after 2010, they and their Liberal allies increased the rate of VAT by 20%, from 17.5% to 20%, and indeed in January 2010, VAT was only at 15%. Given that the lowest paid workers have to spend all their wages in buying goods and services, to live, the rise in VAT is far more burdensome on them than any relief given from a reduction in income tax. Moreover, lower paid workers are more reliant on public services provided by local councils, and it is again those, often free, services that have been cut, by the Tory policies of austerity, forcing those households now to have to pay for what were once free services, or else to do without them altogether.

The Tories also talk hypocritically about the need to make work pay, and that the way out of poverty is through work. Of course, the fact is that it is those in work who have seen their wages fall in real terms, and who are also the main recipients of benefits that have also been cut as a result of Tory austerity. But, as Ricardo and others point out, the idea that it is work that pays, or is the way out of poverty is itself a lie. It is not the workers who are the main beneficiaries of their labour, but the owners of capital, and, unlike in Ricardo's day, the main owners of that capital are not even functioning capitalists, but merely rentiers, people who own money-capital, and whose wealth is in the form of fictitious-capital, of shares and bonds, from which they can simply draw interest. They are no different to the useless parasitic, landed aristocracy that was criticised by Adam Smith, and who have no further useful role to play.

Take someone with £1 million, who even just puts it in a savings account that currently pays them even the measly 1% interest currently available. It would provide them with an income thereby of £10,000 a year, or just under half the national average wage, and about two-thirds the average wage in a place like Stoke. Yet, they have to do no work to obtain this £10,000, they have to own no business, or risk their capital in any way. By the same token, someone with £10 million would get an income from it of £100,000 a year, or four times the national average wage. So, how is it possible to argue that work is the means to riches, or that work is being made to pay as against not working? Its quite clear here that those who do not work, but who have even a modest amount of capital are the ones who are the ones that are benefiting, and the interest they are paid on their capital is the direct result of the surplus value being produced by those in work, whose wages amount to only a fraction of the unearned incomes of the rentiers.

But, then look at the situation that exists in Britain. There are 134 billionaires in the UK. Just 1% interest on a billion Pounds comes to £10 million a year! For that, you would need do no work, invest in no productive activity, simply sit back and draw the interest. And, where does that interest come from? It comes from millions of workers, paid minimum wage, doing jobs of varying degrees of security, who, like the slaves before them, produce all of the goods and services, but who only consume themselves a portion of those very same goods and services, the surplus product they produce thereby being appropriated by capital, and portions of it then being handed over in the form of interest to share and bondholders, rents to landlords, taxes to the capitalist state, as well as lucrative sinecures to all of the bureaucrats, lackeys, and executives who look after the interests of the capitalists, and ensure that the payment of these dividends, rents, and interest continues.  No wonder the Tories see the increase in the number of wage slaves as cause for celebration!

In between the £10,000 interest of the rentier with just £1 million of capital, and the £10 million of interest received by the billionaire rentier (and in fact, the yield they get on their ownership of shares is greater than 1%) there are thousands more who draw large huge incomes in this way without contributing anything of any value to society. The idea that in capitalist Britain work pays, is a cruel deception, perpetrated by the Tories.

Theories of Surplus Value, Part II, Chapter 8 - Part 52

[9. Differential Rent and Absolute Rent in Their Reciprocal Relationship. Rent as an Historical Category. Smith’s and Ricardo’s Method of Research]


Differential Rent divides into two types.

“So far as the difference in rents is concerned, provided equal capital is invested in land areas of equal size, it is due to the difference in natural fertility, in the first place, specifically with regard to those products which supply bread, the chief nutriment; provided the land is of equal size and fertility, differences in rent arise from unequal capital investment.” (p 95)

Differential Rent I, arising from relative soil fertility, affects not just the amount of rent, but also the rate of rent, i.e. the rent as a proportion of the advanced capital. Differential Rent II only affects the amount of rent, the rate of rent staying the same.

In other words, a hectare of land on which £1,000 of capital is invested may produce £100 of rent. If £200 is invested the rent rises to £200, but the rate of rent remains 10%. The effect of these additional investments of capital will then vary dependent upon whether the marginal productivity of capital is rising, constant or falling.

“The existence of different excess profits or different rents on land of varying fertility does not distinguish agriculture from industry. What does distinguish it is that those excess profits in agriculture become permanent fixtures, because here they rest on a natural basis (which, it is true, can be to some extent levelled out).” (p 95) 

In agriculture, the need to meet demand by bringing into cultivation less fertile land, means that existing more fertile land thereby produces surplus profits. But, Marx argues, in industry, it is never the case that new production is introduced, which is less efficient. Of course, the basis of the neoclassical, marginalist analysis is precisely the opposite. It is that production is always being undertaken on the most efficient basis, and that any additional supply requires production to take place on the basis of rising marginal costs, which is the basis for the supply curve rising from left to right.

In fact, all experience supports Marx's position that firms never introduce a new machine or technique on the basis of it being less efficient or more expensive than an existing machine or technique, and so all expansion, all new production enjoys falling, not rising marginal costs of production.

But, this also applies in agriculture, as Ricardo admits. Ricardo does not argue that agricultural productivity falls absolutely, but that it falls relatively, compared to industry. Its possible for more fertile land, such as the North American prairies to be brought into cultivation, for more efficient machinery to be introduced, and for new developments to raise natural fertility of the soil.

These more fertile lands, when brought into cultivation, later, may even throw some of the older, previously more fertile lands out of production. The farmers on these lands then have to turn them over to other agricultural products, or other types of industry.

“The fact that the differences in rents (excess profits) become more or less fixed distinguishes agriculture from industry. But the fact that the market-price is determined by the average conditions of production, thus raising the price of the product which is below this average, above its price and even above its value, this fact by no means arises from the land, but from competition, from capitalist production. Hence this is not a law of nature, but a social law.” (p 96)

Wednesday, 18 October 2017

Theories of Surplus Value, Part II, Chapter 8 - Part 51

If it were the case then that the exchange-value of agricultural products were lower than their price of production, there would be no surplus profit, as a basis for ground-rent, and so the persistence of any rent would have to be explained on some other grounds.

However, even on the basis of the existence of such surplus profits, this is not a sufficient condition, because such surplus profits in other spheres simply results in an influx of capital, and a reduction in market prices to the price of production. The agricultural ground-rent requires an explanation of why agriculture differs, in this respect, from any other industry.

“This is to be explained simply by property in land. The equalisation takes place only between capitals, because only the action of capitals on one another has the force to assert the inherent laws of capital. In this respect, those who derive rent from monopoly are right. Just as it is the monopoly of capital alone that enables the capitalist to squeeze surplus-labour out of the worker, so the monopoly of land ownership enables the landed proprietor to squeeze that part of surplus-labour from the capitalist, which would form a constant excess profit. But those who derive rent from monopoly are mistaken when they imagine that monopoly enables the landed proprietor to force the price of the commodity above its value. On the contrary, it makes it possible to maintain the value of the commodity above its average price; to sell the commodity not above, but at its value.” (p 94) 

Marx sees this as an advance over the position of Ricardo, who saw no economic consequence of land ownership, and explained rent only in terms of Differential Rent, denying the possibility of Absolute Rent. But, this begs a question for Marx too. If the lower organic composition in agriculture is only a “historical difference”, which may disappear, along with it disappears the economic basis of absolute rent. But, there is no more reason that the monopoly owner of land will sell its use value to a capitalist farmer for free than there is that the owner of money-capital will sell its use value to the industrial capitalist for free.

But, Marx has shown that both rent and interest are not additional costs that increase the price of commodities, but are, thereby, deductions from surplus value. If surplus profit disappears in agriculture, so that agricultural products sell at their price of production, then the payment of rent must reduce the profit of enterprise of the capitalist farmer below the average, just as any payment of interest by an industrial capitalist pushes their profit of enterprise below the average.

Tuesday, 17 October 2017

UK House Prices Are Lower Today Than Ten Years Ago

An analysis by the BBC and the Open Data Institute (ODI) in Leeds, using Land registry data, shows that in most of Britain, house prices are lower in real terms today than they were ten years ago, in 2007. It shows that the bubble in house prices has been grossly distorted by the extent to which house prices have continued to be pushed higher in London and the South-East. That doesn't mean that house prices are not still in a bubble in the rest of the country, only that it is a smaller bubble than in the South. In large parts of the country, house prices have continued to fall not just in real terms, but also in nominal terms, as I've described over the last few years, in a number of blog posts. In fact, when my wife saw this BBC report, her first comment, was “I could have told them that, just from my studying of house prices.” 

It also exposes, from another angle, the fallaciousness of the argument that high house prices are a result of inadequate housing supply. In fact, as I've described in various posts, over the last few years, there is actually 50% more houses per head of population today than there was in the 1970's. The problem is not a lack of supply, but inflated speculative demand that has pushed up market prices, and which has thereby pushed up development land prices, facilitated by the ridiculous Green Belt constriction, which then pushes up the cost of new house building.

The real problem with the UK housing market is that prices have been pushed up due to speculation, in just the same way that the prices of other financial assets such as shares and bonds have been pushed up by speculation. That speculation has been driven into more and more speculative assets, the latest example of which is the bubble in worthless assets such as Bitcoin, and other crypto-currencies. It is the consequence of central bank and government policies, to keep asset prices such as property, shares and bonds inflated, because it is these paper assets – fictitious-capital – which are the form in which the capitalist class holds the vast majority of its wealth.

As the annual average rate of profit soared in the 1980's and 1990's, thereby increasing the supply of money-capital way in excess of the demand for money-capital, for real productive investment, global rates of interest were driven down to ever lower levels. The converse of those low rates of interest was higher capitalised prices of financial assets, and property. Eventually, the yields on these assets fell to such a level that the owners of them became more and more concerned not to lose capital value, as a consequence of a higher rate of interest, than they were to obtain a very marginally higher yield. The task of central banks became to keep those asset prices inflated, which they did by telling financial markets they had their back, whether it was via the so called Greenspan Put, which meant reducing official interest rates whenever the bond or share markets began to falter, or via the policy of QE, the LTRO's of the ECB, and so on, which pumped liquidity directly into the purchase of government bonds, and in some cases, commercial bonds, and mortgage bonds.

It is that central bank and government backed encouragement of such speculation, which drives potential money-capital into these speculative assets, and thereby drives it away from real productive investment, which has caused the bubbles in property prices, and in stock, bond and other asset markets. The bubble in property markets long preceded the financial crisis of 2007/8. In fact, as I've written previously, it can be traced back as far as Tory Chancellor Reggie Maudling in 1960, but it can most certainly be traced back to Tory Chancellor Tony Barber in 1970, with Nigel Lawson also giving the property bubble a further injection of hot air in the 1980's. 

What the 2008 crisis did was to halt that further inflation of that bubble in large parts of the country. Again illustrating the fallacy of the argument that the high prices are due to a shortage of supply, in 2007/8, prices dropped 20%, as the financial crisis temporarily put a stop to all such speculation. And, in large parts of the country, as this survey shows, the fact that wages then fell, or have been stagnant, in the aftermath of that crisis, has prevented prices rising again, despite all of the attempts to goose the market via, the Help To Buy scam and lower mortgage rates. The places where prices have risen, in London, the South-East and East of the country are places where domestic and foreign speculators have been able to, once more, increase speculative demand, and thereby push up prices.

In fact, not just since 2007/8 have prices in many parts of the country continued to fall. As I've reported in the past, I sold my house at the start of 2010 for £150,000, but I could buy the identical house today for £125,000, meaning not just a fall, since 2010, in real terms, but a fall even in nominal terms. The extent to which this was already a huge bubble is shown by the fact that this £150,000 was five times what I had paid just over twenty years earlier, just as the £20,000 plus I got for my previous house was four times what I had paid for that only a decade before. General inflation and wages had not risen by anything like those amounts during the same period. It is not that there is not housing need, the increased number of people who are homeless, sleeping rough or in substandard accommodation shows that there is, but need is not the same as demand. Demand requires that the need is backed up by the money required to purchase, and the fact is that house prices have been driven up by all of this speculation to levels whereby increasing numbers of people do not have the money to create that effective demand. That is also why builders have not taken advantage of these high prices to increase the number of houses they build, and thereby make bigger profits. They know that there is not enough effective demand, i.e. demand backed by money, to be able to buy a larger number of houses thrown on to the market, at these hugely inflated prices.

A look at bank lending shows that nearly all of it has been going into property speculation of one form or another. That is the other side of the coin that sees small and medium sized firms unable to obtain bank finance, and turning increasingly to more costly forms of borrowing such as via personal credit cards, and is also why there has been a significant increase in peer to peer lending, which enables smaller firms to borrow, but at rates more like 10% p.a. It is also why ordinary households have been driven into higher levels of debt, and increasingly higher-cost means of providing it, again through the sharp rise in credit card debt, and more worryingly the rise in debt to payday lenders charging rates of up to 4000% p.a.

Its likely that the Bank of England will be led to raise its official interest rates next month, doubling it from 0.25% to 0.50%. To the extent that it is seen as part of a process whereby central banks are finding it impossible to reduce official rates any further, and where QE has already pushed up asset prices to levels where yields are near, at, or below zero for many government bonds, and so where the only reason for holding such assets has been to obtain capital gain, rather than yield, but where the potential for any such further capital gain has become increasingly diminished, and the potential for a sharp sell-off increasingly likely, the rise in official rates is likely to have perverse consequences, compared to orthodox economic theory. 

To the extent that it sends a message to speculators that they can no longer rely on the central bank having their back, it will see them start to re-evaluate the risk of holding UK government bonds. If the only point of holding them was to obtain capital gain, or at least in the hope of not suffering a capital loss, that motivation will be removed. Some institutional investors will have to continue to hold such bonds, but they may be inclined to switch where possible to alternatives, such as German Bunds. Other speculators, particularly foreign speculators will be even more likely to make such a switch given the risk surrounding the value of the Pound caused by Brexit. So, to the extent that these assets are sold, and the money moved out of the country to be used for speculation in other financial assets, rather than this rise in official interest rates causing the value of the Pound to rise, as orthodox theory would suggest, it could fall. In the same way, over the last year, as the Federal Reserve has been raising its official interest rates, and stopped QE, the value of the Dollar has been falling rather than rising. On the other hand, as the ECB has been increasing its QE in the last year, the value of the Euro has been rising.

Given that the Bank of England has admitted that a large part of the current rise in UK inflation, which today hit 3%, and is set to rise further, has been due to the fall in the value of the Pound, as a result of the Brexit vote, any further fall in the Pound due to a flight of hot money out of UK financial assets, as speculators no longer feel the hand of the Bank of England behind them, is likely to cause UK inflation to rise further in the next year.

In the last few months, the extent of that bifurcated housing market, whereby prices in London and the South-east has been driven by rampant speculation has also been reflected in the extent to which it is also highly susceptible to a crash, as that hot money disappears overnight. London house prices have been falling now for some months, and now they are falling at the fastest pace since the financial crash of 2008. The rise in the Bank of England's official interest rate, which is a part of a global move by central banks to raise rates, as they fear a new global asset price bust, is likely to halt that speculation even more sharply. Yet, as the Grenfell Tower disaster showed, again illustrating the fallacy of the supposed shortage of housing supply, there is a large amount of expensive unoccupied property in London that has simply been built and bought for speculative purposes, not even to be let out!

The rise in official interest rates is long overdue. The central banks even now are only being forced into it, because despite their attempts to divert all available money-capital into such speculation so as to keep asset prices inflated, the fundamental laws of economics have asserted themselves. As Marx put it,

“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) 

Having driven yields to near or below zero, they instead found themselves living on capital gain, and thereby destroying the very capital base upon which the future interest depended. At the same time, the potential for making large profits, encouraged some to “ reconvert into industrial capitalists”, which we have seen with the development of new businesses such as Spacex. And, as the economy has continued to grow, despite the attempts to divert available money-capital into the inflation of asset prices, employment has grown, the demand for commodities has grown, and businesses are led inexorably to have to use their profits to invest in real capital, so as not to lose market share to their competitors, and the consequence is that the market rate of interest rises, irrespective of the official rates of interest.

It creates the conditions for a bursting of those speculative bubbles, and now the central banks are rushing to catch-up, to try to deflate the bubbles before they burst. The history of such attempts does not suggest a great likelihood of their success.

Theories of Surplus Value, Part II, Chapter 8 - Part 50

[8. The Kernel of Truth in the Law Distorted by Rodbertus]


Marx summarises six errors, or “pieces of nonsense”, in Rodbertus' theory.

  1. His omission of absolute surplus value as a means of raising the rate of surplus value.
  2. His failure to treat the value of machinery as a “constant part of value”.
  3. That he does not treat machinery used in agriculture in the same way he treats materials used in manufacture, and does not charge back to agriculture the value of the material used in the machine production.
  4. That raw materials enter the costs of all industries, whereas that is not the case in transport or extractive industries, where it is only auxiliary materials that enter such costs.
  5. That he fails to recognise that whilst raw material enters many areas of manufacture, the more so the production is closer to the production of items for final consumption, the other elements of constant capital becomes much smaller. As productivity rises, but the proportion of fixed capital and auxiliary materials shrinks.
  6. He confuses average prices/prices of production with values. 
Stripped of all this “nonsense” a kernel of truth remains in Rodbertus' ideas.

“When the raw products are sold at their values, their value stands above the average prices of the other commodities or above their own average price, this means their value is greater than the costs of production plus average profit, thus leaving an excess profit which constitutes rent. Furthermore, assuming the same rate of surplus-value, this means that the ratio of variable capital to constant capital is greater in primary production than it is, on an average, in those spheres of production which belong to industry (which does not prevent it from being higher in some branches of industry than it is in agriculture).” (p 93)

Marx's comment that “their value stands above the average prices of the other commodities” is actually meaningless. The value of any commodity may be above or below the value or average price/price of production of other commodities, because all contain different amounts of value, require different amounts of labour-time for their production. What Marx really wanted to say is simply what he then says, which is that the value of these raw products is higher than their price of production, and so then produce surplus profit and rent.

The reason is that the organic composition of capital is generally lower for this production.

“This would therefore only be an application of the law developed by me in a general form to a particular branch of industry.” (p 93)

In other words, The Law of The Tendency For the Rate of Profit to Fall, as the organic composition of capital rises. To explain agricultural ground-rent, it is necessary to show that the organic composition of capital in agriculture is generally lower than in manufacturing. This seems prima facie to be the case, because a reliance on manual labour seems more apparent in agriculture, and capitalism had developed manufacturing more rapidly. But, Marx says,

“This point 1 appears certain to apply to agriculture on an average, because manual labour is still relatively dominant in it and it is characteristic of the bourgeois mode of production to develop manufacture more rapidly than agriculture. This is, however, a historical difference which can disappear.” (p 93)

And, indeed, in the last century, agriculture has become much more capital intensive, replacing labour on a huge scale. The increasingly intensive nature of agriculture went along with its extensive development, and was in some senses, conditional on it. It was the opening up of the North American prairies that facilitated the creation of huge industrial farms, and it was only the scale which made the development of powerful and complex pieces of machinery, such as the combined harvester, worthwhile. It has been furthered by the introduction of satellite navigation and GPS systems, that now can control such machines, even without the need for machine operators; it has made possible the use of science for fertilisers, seeds, and genetic modifications of crops, the use of aircraft for crop dusting, and so on, that would not be practical on smaller scales. 

Similarly, the opening up of those North American lands and the South American pampas, made possible cattle production on a huge scale, all connected to industrialised food processing industries. Similar processes have increased the rate of turnover of agricultural capital, as witnessed by the introduction of the Safrinha and additional harvests in Brazil, which reduces production time, and thereby reduces the amount of labour to constant capital.

Back To Part 49

Forward To Part 51

Monday, 16 October 2017

Deal Or No Deal

Yesterday, on the Andrew Marr Show, Richard Tice of Leave Means Leave, said that every business person knows that no deal is better than a bad deal.  Do they?  Tories and Brexiters frequently throw out these supposed truisms without them being challenged.  A moment's consideration of this proposition shows it to be complete nonsense, and something that, in fact, every business person rejects quite frequently.

Suppose you are a business that has spent £1 million producing your output of widgets.  You now come to sell them.  If the average rate of profit is 10%, you might expect to sell this output for £1.1 million.  However, what you expect to be the case, and what is the case are two different things.  Suppose your output amounts to 1.1 million units that you expect to sell for £1 each.  There are any number of reasons why at a market price of £1, you may not be able to sell the whole 1.1 million units.  If, in fact, say you can only sell 1 million units at a price of £1, you will only get back the capital you laid out, and so make no profit; if you can only sell 900,000 units you will actually make a loss.  Or it might be the case that you can sell all of the 1.1 million units, but only by charging say £0.90 per unit for them, in which case your income would amount to £990,000, leaving you again with a £10,000 loss.

Tice's argument is that any of these situations where you do not make the average profit constitutes a bad deal, which "every business person" knows you should walk away from.  But, what would be the consequence of that?  It would be that you then do not sell any of the 1.1 million units you have produced, and so you would actually have lost the whole of the £1 million of capital you laid out for this production, solely in order to have the satisfaction of knowing that you had not accepted a "bad deal"!  Any business person that operates on that basis would quickly go out of business.

No business person wants to think that they have had to sell their output, or stock for less than a price that provides them with the average profit, but the vagaries of the market mean that it is frequently the case that you have to do so, just as at other times you might be able to sell at prices that give you more than the average profit.  Still less does a business person want to sell at a price that results in them making a loss, but in order to be able to replace your capital, so as to be able to stay in business, it is sometimes necessary to do so.  If you only get back £900,000 of your capital, rather than the £1 million you laid out, at least you have that £900,000 to use to engage in production again, or to buy different stock to sell.  If you adopt the "no deal is better than a bad deal" position you have no capital returned to you with which to stay in business.

This no deal is better than a bad deal nonsense that the Tories and the Brexiters keep repeating is simply a reflection of the fact that they simply have not freed themselves of the delusion that Britain is in the driving seat, and in some way able to dictate terms.  The argument would only apply if it were the EU that were trying to sell something to Britain.  A buyer, unless they are in peculiar conditions, can always walk away from a "bad deal", and wait for the seller to change their mind, or take their business elsewhere.  But that is not at all the position that Britain is facing here.

Britain already sells into the EU as part of the single market and customs union.  What it wants to do is to keep selling to the EU on those same terms, but not to undertake all of the costs and obligations that other members of those institutions are bound by.  It is the EU that is in the position of being able to say to Britain that it is prepared to walk away from such a "bad deal", not Britain.  Britain is a trading nation that relies on being able to undertake vast amounts of importing and exporting of goods and services, and currently the majority of that trade is done with the EU, on these favourable terms.  If the EU decides to walk away from the "bad deal" that Britain currently wants to impose on them, it is Britain not the EU that will lose out as a consequence.

The Brexiters argue that the EU sells more to Britain than Britain sells to the EU.  But, the EU is a $14 trillion economy, with 450 million people, whereas Britain is a $2 trillion economy with 70 million.  If Britain walks away with no deal, it means that British exports to the EU will face tariff and non-tariff barriers.  That means that Britain will find it harder to sell into the EU, thereby hitting UK jobs, and company profits, and the government taxes that are paid out of them.  Britain will then find itself in the position described above of a company that has laid out £1 million of capital to produce its output, but can't sell it profitably.  Nor is the solution to that for Britain to sell that output instead to China, India or some other non-EU country.  Selling to those countries would involve at least the same kind of levels of tariffs, as would be faced by Britain outside the EU without a deal.  Moreover, in terms of some of these larger economies like China, India, the United States, precisely because they are big economies and large markets they would be unlikely to offer favourable trade terms to Britain, because all of the economic muscle and leverage would rest with them not Britain.  It would be impossible to negotiate such a favourable trading arrangement with them as Britain already has within the EU.

On the other hand, the EU could easily replace the imports that currently come from the UK.  In fact, take a company like BMW that produces the Mini.  If it found that without a deal it was difficult to maintain sales into the EU, the incentive would be for BMW to shift its production from Cowley to the European mainland.  On the other hand, many of the commodities that Britain imports from the EU, it would still have to import, even if tariffs were placed upon them, because they form part of complex production chains, whereby components move back and forward across borders many times.

The Brexiters, like Tice, have argued that already some British producers are switching to UK produced commodities, but this again illustrates the problem.  Suppose, Britain were to introduce a 10% tariff on goods imported from the EU, and this meant that some UK production was then cheaper, what is the actual consequence?  Firstly, it means that whatever this commodity is, UK consumers are now paying more for it, even if less than the additional 10% of the tariff imposed on it, although its likely that UK producers would adjust their prices up to that level.  So, the cost of living for UK workers rises.  Consider the further effect of that.

Suppose that UK workers require £100 per week each to reproduce their labour-power, and this is then paid to them as wages.  If UK capitalists have  £5,000 of capital to employ, they might then employ 10 workers at a cost of £1,000 a week, using the other £4,000 for materials and instruments of labour for those workers to work with.  Now, if as a result of the 10% tariff, or the fact that UK workers have to buy more expensive domestically produced commodities, they require £110 per week, which is paid to them in wages, the capitalist with their £5,000 of capital can only employ 9 workers, and with the given technical composition of capital, that would also mean that they would only employ £3,600 of capital for materials and instruments of labour.  It means that not only does the rate of profit fall in Britain, as the higher value of labour-power reduces the rate of surplus value, but it also means that less capital can be employed in total, which results in an economic contraction.

In reality, the economic contraction would be greater precisely because of the fall in the rate of profit.  First of all, capital would move to other countries where it could make a higher ate of profit.  That can be seen already in a number of spheres, for example in IT, and new industries such as media and computer game production, but it is likely in industries such as agricultural production and food processing, which will also face increasing problems obtaining labour, as free movement ceases, and so where that capital will move to those parts of the EU where currently much of that labour comes from, such as Romania, Bulgaria etc.  It will mean that those parts of the country such as the East Coast, where those industries are important will suffer a further economic stagnation, and decline as opposed to the recovery that the Brexiters promised them.

Theories of Surplus Value, Part II, Chapter 8 - Part 49

“But so far as the relative magnitude of profit and rent is concerned, it does not by any means follow that, because agriculture is relatively less productive than industry, the rate of profit has fallen absolutely. If, for instance, its relationship to rent was as 2:3 and is now as 1:3, then whereas previously it formed two-thirds of rent, it now forms only one-third, or previously [profit] formed two-fifths of the total surplus-value and now only a quarter, [or] previously 8/20 and now only 5/20; it would have fallen by 3/20 or [by] 15 per cent.” (p 90)

But, the mass of profit may still be greater. Suppose 1 kilo of cotton costs £2, and falls to £1. Previously, 100 workers spun 100 kilos of cotton, and now spin 300 kilos. So, productivity has risen faster in manufacturing than in agriculture. Previously, cotton amounted to £600 for 300 kilos, and now costs £300. The wages of workers (300) previously amounted to £300, but now wages of workers (100) amount to just £100. Marx assumes that in both cases, machinery equals £60.

Marx assumes that the workers are paid in their own product, so that the fall in its value reduces the value of labour-power, and raises the rate of surplus value. Where previously surplus value equalled 20% of wages, he assumes it now accounts for 40%.

Comparing the cost of 300 kilos, in the two cases, it is then:-

Case 1

Raw material 600, machinery 60, wages 300, surplus value 60 = £1,020

Case 2

Raw material 300, machinery 60, wages 100, surplus value 40 = £500

In Case 1, the cost of production is £960, and profit is £60, giving a rate of profit of 6.25%. In Case 2, the cost of production is £460, and profit is £40, giving a rate of profit of 8.70%.

If rent is 1/3 kilo, in the first case, it equals £200; in the second case it is £100. The rent has fallen because the raw product has fallen in value by 50%. But, the value of the total product has fallen by more than 50%.

The industrial labour has become relatively more productive, compared to the agricultural labour. In the first case, the industrial labour stood in relation to raw material as 360:600, or 6:10 = 1:1.66. In the second case, it has fallen to 140:300, or 1:2.143. But, the rate of profit has risen, and the rent has fallen.

If the amount of cotton spun doubles, in the second case, we would have:-

600 material, 120 machinery, 200 wages, 80 surplus value = £1,000. The cost of production is £920, and with £80 profit that gives a rate of profit still of 8.70%. But, that is a higher rate of profit than in Case 1, whilst the amount of rent would be the same as in Case 1.

“It does not by any means follow from the relative dearness of the agricultural product that it yields a [higher] rent. However, if one assumes—as Rodbertus can be said to assume, since his so-called proof is absurd—that rent clings as a percentage on to every particle of value of the agricultural product, then indeed it follows that rent rises with the increasing dearness of agricultural produce.” (p 91)

Sunday, 15 October 2017

Grasped Brexit Straws Sink

In the aftermath of the EU Referendum, Brexiters, seeing the Pound tank, grasped at a series of straws to argue that the predicted economic calamity that would result from Brexit hadn't happened. It was, of course, nonsense. No serious person was suggesting that the economy would collapse immediately after simply a Brexit vote. Moreover, even the predictions about economic woes that were made were based on the idea that Article 50 would be triggered soon after the vote, not that it would take nine months, even for the process to be started. Like many of those who voted Labour in the General Election, in the belief that Labour would prevent a hard Brexit, and might even prevent a Brexit at all, large sections of the business community, having seen the delay, has seemed to work on the basis that a hard Brexit would be avoided, and that even a soft Brexit based on some kind of continued membership of the single market and customs union would be negotiated. So, it's no wonder that, so far, none of the major economic ill effects of Brexit have been felt. Even the fall in the Pound flattered the overseas profit figures of large British companies, which boosted their share prices.

At every opportunity, the Brexiters chirped up that UK economic growth was strong, and so on. The truth was that even that was a mirage. UK economic growth has been based, to an extremely unhealthy degree, on consumer spending, and, even more unhealthily, that consumer spending has been based not on rising incomes, but on rising levels of private household debt. That economic model was set in place by Thatcher in the 1980's, as she built a low-wage, low-skill economy designed around the needs of inefficient small businesses, and around the interests of the landed and financial oligarchy whose wealth resides in continually inflating property and financial asset prices. It was that economic model that led ultimately to the financial crash of 2008, just as that same model developed by Thatcher's co-thinker, Reagan, led to the same consequences there.

But, now, even those straws grasped by the Brexiters, to try to deny that Brexit will cause economic chaos, are being dragged beneath the water, as the arguments of the Brexiters begin to drown. One of the consequences of the low-wage/low-skill economic model developed by Thatcher was that it created the dynamic by which productivity growth is undermined. In a slave economy, productivity levels are always very low. For one thing, the slaves have no reason to work harder or more effectively; they tend to misuse the tools and equipment they are given, and that means that less efficient, but more resilient equipment has to be used. The same thing was seen in the USSR. But, also with available low wage labour, employers have no reason to invest in new technologies. David Ricardo pointed out that wages have to reach a given level before it becomes worthwhile firms introducing labour-saving technology. Marx describes how, at one point, labour-power was so cheap that employers used women workers, rather than horses to pull canal barges.

And, we see the consequences in the arguments of the Tories. They continually talk about the high levels of employment. But, in a slave economy there is always full employment; it doesn't benefit the slaves, but the slave owners. That is the case today, we have high levels of employment, but it is very low paid employment, very insecure employment, and those that benefit from it are not the workers, but the employers who thereby make the profits from the labour performed by all those workers. Yet, although that benefits the small scale employers, and may benefit all employers in the short-term, in the longer term it is clearly destructive. The reliance on this low paid, low skill labour has meant that British industry has become less and less productive, and when it comes to global capital, that means increasingly uncompetitive, and increasingly unprofitable.

Historically, productivity in the UK has risen by around 2% p.a. From 2010, that has slumped to around 0.2% p.a., but now, productivity has even started to fall. It fell by 0.5% in the first quarter of 2017, and by a further 0.1% in the second quarter. Britain is now considerably less productive than other economies in the rest of Europe, and its position is deteriorating. It means that UK workers must work longer and harder to produce the same amount of value as their EU counterparts. The reflection of that is also to be found in the falling value of the Pound, which is just another way of saying that an hour of UK labour produces less value than an hour of EU labour. It means UK workers' living standards are set to decline further, and it is why in order to maintain consumption, they have again been led into increasing their level of household debt.

And, the inevitable consequence of this systemic weakness of UK productivity is that UK economic growth has also now started to slow down, more or less to a standstill. UK workers were already massively overburdened with household debt. It has already risen to the kinds of levels it reached before it exploded into the financial crisis of 2007/8. And, today, an increased proportion of it is held in the form of credit card debt, and debt to pay day lenders, let alone the amount of debt that is hidden from view because it is in the hands of the back street loan sharks, as increasing numbers of the population have found they cannot get loans from other sources, or need to resort to these high interest lenders, just to be able to pay off their interest payments to other lenders. Huge amounts of income for an increasing proportion of the population now goes not to finance their consumption, but simply to be able to pay off these huge amounts of interest. Its no wonder, therefore, that with wages falling further and further behind inflation, not only has the level of debt risen even further, but the level of consumption has also begun to fall back. That means the main leg upon which the growth in the UK economy was shakily based, has been kicked away.

UK growth has slowed to just 0.3% in the last two quarters. Its unlikely that the UK will grow by more than 1.5% for the whole of 2017, and the trajectory is steadily downwards. This is at a time when global growth is on a strongly upwards trajectory. The UK now has the slowest growth in the EU, and in the G20. And the IMF and World Bank are both forecasting increased global growth for this year, and for next year. One reason that global primary product prices has started to rise again, is that Asian economies are again growing strongly. The UK economy is moving, under pressure of Brexit, in the opposite direction to the rest of the global economy.

That too has devastating consequences for the UK economy. Firstly, increasing global growth, and rising primary product prices means that Britain, which has to import many of those products will find itself having to pay those higher prices for its imports, pushing up domestic inflation, at a time when slowing productivity is pushing up domestic prices. That is on top of the inflationary consequence of the falling Pound, due to Brexit. Either UK workers living standards will fall further, or else UK profits will have to fall, which will mean less capital accumulation, less available for dividends, rents, interest and taxes.

One consequence of that has, indeed, already been felt. On the back of previous economic growth, the Tories claimed the Chancellor would have room to be able to increase government spending. But, the rapid slowdown in the economy, with the consequent reduction in the government's revenues, means that the government finances are now again tight, with two-thirds of his £26 billion war chest wiped out.

And, higher economic growth in the rest of the world is leading to higher global interest rates. The US Federal Reserve is already reducing the size of its balance sheet, and is raising its official interest rates. Those official interest rates have little effect on the market rate of interest paid by businesses to borrow, but they do affect the prices of bonds, with a consequent effect on other financial assets, adjusting the calculation between the benefits of investing in real capital, as opposed to speculating in financial assets. With central bank support withdrawn, the advantages of investing in real capital accumulation, rather than speculation in financial assets increases, which creates conditions for economic growth to rise further. The ECB is set to cut back its QE by 50% in January, and that is likely to have to be speeded up, as global growth and inflation rises, and market rates of interest rise with it.

The UK facing rising prices, a falling Pound, reduced government revenues, at a time it needs to increase spending will also see interest rates rise. The Bank of England seems set to raise rates as early as next month. That comes at a time when the Bank of England has become increasingly concerned itself at the level of household debt, and has told commercial banks to tighten down on their lending to households. Yet, its clear that most households are not at all prepared for even such minor rises in interest rates. But, we know also that it is at such times, when people find that they cannot cover their repayments that they go in desperation to the higher cost lenders. When people and businesses only want money to use as capital or to finance some increase in their consumption, they can easily respond to higher interest rates by cutting back their plans, but when people and businesses need to borrow money purely as money, as currency, to pay their bills and stay afloat, they are led to pay almost any price to do so, and that leads to interest rates spiking higher, and then to credit being cut off, as lenders increasingly fear not getting paid back.

These are the conditions that Britain is facing in the coming months, even before Brexit actually happens.