Wednesday, April 29, 2009

A pragmatic tool.

On September the 2nd 1792, a Parisian mob began a killing rampage that lasted four days. Investing the city’s prisons one after the other, they executed all the prisoners (a total of over 1000), mostly aristocrats, suspected of plotting for the return of monarchy, and refractory priests, who had refused to swear allegiance to the constitution. This massacre took place at a moment of high tension – accused of treason Louis XVI had been deposed in August, food was scarce, Prussian armies were advancing on French territory to the East, and troops were being levied and armed, while the popular press called for dire measures against “the enemies of the people” – and was to be known as the First Terror. Danton and Robespierre were to apply it as a mode of government, culminating in the Great Terror. They and their supporters were self proclaimed terrorists, who proceeded to execute all opposition. After the fall of Robespierre in July 1794, a White Terror occurred in the South of France from Lyons to Marseilles, as a reaction to the revolutionary excesses. And a Second White Terror, also in the South, set in after Waterloo with the extrajudicial execution of many of Napoleon’s soldiers and officers, and of a few surviving republicans.

Terror and counterterror also took their toll during the Russian revolution. The Soviet Red army was as ruthless as had been the “Blue” army of the first French Republic. And the “Whites” – Denikine and Wrangle in Crimea, Koltchak in Siberia – supported by foreign powers (France, GB, US, Japan) were as reckless as had been the Vendean and the Chouan uprisings of 1793. The German revolution of the Weimar republic did not escape the rule of terror either. All these examples (and one could include the English revolution of 1642, and the Iranian revolution of 1979) of mass and often indiscriminate murder took place in the context of class war. The new dominant bourgeois class must destroy all the ancient allegiances, and replace them with new ones. (This necessary destruction may explain why all these events ended with the rule by terror of dictators). Be they serfs or Grand Dukes, the royal subjects must become citizens, free to work and equal with regards to the law. Multilayered societies rooted in feudalism have to be restructured into two tiered systems of a propertied class and a wage-dependant proletariat. History shows that this is never a gala supper.

Revolution and civil war seem to promote terrorism. Colonial rule favours insurgency. The first modern nations to break away from empire were the Swiss and the Dutch. But the classic example was the American War of Independence. It set down the basic premises for success, foreign aid and a united front. The function of colonies is to supply the Metropolis with raw materials in exchange for consumer goods. This means that industry in the colonies is underdeveloped, and cannot sustain an armed rebellion that needs a constant supply of weapons. These can only come from another colonial power, so that “my enemy’s enemy is my friend”. For the American insurgents the friend was the then still kingdom of France – always ready to fight the hereditary English foe – who provided the guns and troops that determined the outcome. This could have led to a simple change of masters. But events in Paris and the ensuing British blockade of Europe turned attention away from the new American nation, and gave them time to build up their own industries.

National liberation is usually a protracted struggle. The colonial master does not relinquish his hold easily. And so the civil administration becomes a military occupation where the dividing line is easily drawn, the soldiers and their collaborators forming one party, and the civilian population making up the other. The soldiers are identifiable and can be targeted. The insurgents are indiscernible. Soldiers are ambushed and see their comrades fall. They then vent their anger on whoever they find, and a cycle sets in of terror and counterterror. This widens the gap between the two parties and makes them irreconcilable. By this time the budding nation is finding its unity in the form of patriotism, a nationalist mysticism that inspires great sacrifices. The same succession of events was to occur when Napoleon occupied Spain, as depicted by the French firing squad in Goya’s Tres de Mayo. The 21st of August 1941 on a subway platform in Paris, a twenty-two years old member of the French Communist Party, Pierre Georges later known as Colonel Fabien, shot down a German officer. In retaliation the Germans executed several hostages. This tit for tat included collaborationists, and went crescendo until the liberation of France in 1944. After the war, national liberation movements blossomed in one colonised nation after the other. A few were helped by the US, ever wary of European empires. But most of them could only count on support from the USSR, or China. This automatically involved them in the Cold War between communism and the “free world”. And terror was followed by counterterror on a global scale.

Terror can be the act of an unruly mob against its class enemies, and it can be the tool of totalitarian rule. The hit and run tactics of insurgents are judged contrary to the rules of war, and are treated as terrorism. And counterinsurgency is always involved in counterterror. However, the ultimate form of terror must be the bombing of urban concentrations. Siege weapons had traditionally been aimed at a town’s defences. The early canons were used to batter down walls. But the invention of explosive and incendiary shells changed that principle, and Londonderry was the first city to endure this novelty during the siege of 1689. As bombing took to the air, so did terror. In this case, Guernica was the experimental victim. Then came carpet bombing and the two gigantic mushroom clouds over Japan. Terror can be used against a whole nation as an act of war, to shock and awe.

Terrorists murder people with bullets and bombs. Some victims are in uniform, the others may be men, women or children. Terrorist organisations justify their acts as the necessary path to fulfilling an ideological agenda. They usually have subordinates to do the dirty work, brainwashed teenaged soldiers trained to kill and to lay down their lives for the cause. Terrorists have no moral values and no respect for human life. They believe the end justifies the means. Terror can be a tool of rebellion, and of national and imperial oppression. In his Memoirs, George Grivas wrote,
The British – who arm their commandos with knives and instruct them to kill…from the rear – protested vigorously when such tactics were applied to themselves. It may be argued that these things are only permissible in war. This is nonsense. I was fighting a war in Cyprus against the British, and if they did not recognise the fact from the start they were forced to at the end. The truth is that our form of war, in which a few hundred fell in four years, was more selective than most, and I speak as one who has seen battlefields covered with dead. We did not strike, like the bomber, at random. We shot only British servicemen who would have killed us if they could have fired first, and civilians who were traitors or intelligence agents. To shoot down your enemies in the street may be unprecedented, but I was looking for results, not precedents. How did Napoleon win his victories? He took his opponents in the flank or the rear; and what is right on a grand scale is not wrong when the scale is reduced and the odds against you are a hundred to one.”
Quoted by Robert Taber in The War of the Flea, Paladin 1970)

A topsy-turvy world.

Capitalism has a history and an ideology. Its story begins with conquest and land grabbing. The personal property of the Earth’s surface was first acquired by the right of might. For the price of their lives, the planet’s inhabitants had to submit. For the price of their survival, they had to work for the landlords. After the force of arms came the traders with their own particular weapon. Money commands both the pen and the sword. Then, much later, came machines and wage labour, opening the path for a huge expansion of capitalist accumulation. From land to money, and on to the tools of production, private property has triumphed over all other forms of ownership. And yet, once again, public bailouts of the private sector are in complete contradiction with this continuing dominance. Why does private capitalism flounder at regular intervals, and why do all agree to put it on track again? Are the glamorous rich so essential to human existence that they must be saved at any cost?

The value produced contains the value invested and the added value. But the invested value is in turn made up of investment and added value, and so on into the past. This means that the value produced is in fact the sum of added values, present and past. More value is added to existing value until the product has reached its final stage. At which point it can still transmit its value to other products as part of the investment. However, the ultimate phase of production supplies goods and services that can neither acquire more value, nor transmit their value. This terminal accumulation of value must therefore be consumed. And the sum of added values represents the value of that consumption. There are no clear-cut boundaries between production departments. Most “consumer” goods and services, from cars to soap and from counselling to security, can transmit their value as production costs. Only usage finally determines the categories of investment and consumption.

Supposing the extreme complexity of production is represented by just three stages, raw materials, intermediary products, and consumer goods and services. The third and last stage contains the value of the two preceding ones plus its own added value. If each stage takes a year, the value consumed in a year has been accumulated over three years. But this accumulation is the same as the value produced by all three stages in one year.

If there is growth, however, the third stage is the last to grow. Until it does, the yearly sum of added values must be greater than the value to be consumed, during the same period, which seems to invalidate their equality. This happens at the beginning of a growth cycle. It is a temporary phase, during which growing incomes can be invested to increase added value, without upsetting the balance of supply and demand for consumption. Paid with profits, the work force increases, so that there is more value added for a still unchanged supply and demand. When consumer supply does begin to grow, the demand is lacking.

The sharing of added value varies with changing modes of production and class struggle. But the three beneficiaries are always the same. The state takes its share by levying taxes. Labour gets the wages it can. And the rest is a return on investments, in the forms of rent, interest and dividends. Governments consume their taxes on wages for the armed and security services, and for functionaries, on military hardware, on the upkeep of public buildings and infrastructure, et cetera. Wages are to a large extent spent on consumption. The higher brackets invest a part of their salaries, while the lower ones have recourse to credit to supplement their meagre incomes. What the rich do not spend, they can lend to the poor (and the state) at interest. There remains the part of added value that is a return on investments. Rent, interest and dividends can be someone’s retirement pension, in which case they will probably be spent on consumption, though their value was in the past saved from consumption and invested. But they can just as well be an addition to an already comfortable salary, or be simply too big to spend, or go to an investment fund, or whatever, in which case they will probably be invested.

The sum of added values is the value that needs to be consumed. But, because a part of added value is invested in real estate, bonds and shares, consumer demand is insufficient. This problem can be resolved in two ways. Consumer goods can be traded for investments on the world market. In which case, the commercial partners must exchange investments for consumption, meaning less value added, less work, and less investments on their territories. Alternatively, demand for consumption can be sustained by credit, which is a form of monetary creation. In which case debts accumulate, and that leads to the present situation where subprime loans go toxic and banks go bust, or have to be saved by massive injections of tax-payers’ money. Neither solution is satisfactory, so it remains to be seen how growth can be financed, other than by investing added value instead of consuming it.

If all added value goes to demand for consumption, as it ultimately should, how can the value of investments increase and, thereby, the amount of added value and the supply of consumer goods and services? For a start, many investments are non-productive and do not increase added value. Buying existing shares merely modifies the ownership of a company. And, though it may increase the value of each share and of the company, it does not increase the company’s productive capacity. It can, at best, increase the company’s borrowing capacity. The same goes for housing and commercial buildings. If they exist already, buying them does not increase their quantity, though it may increase the price of real estate in general. In fact, increasing the value added and the wealth distributed means an increase in the production of goods and services. The increased wealth created by bubbles in real estate, shares or bonds, is nothing but an illusion.

The productivity of labour remained unchanged for most of history. After the invention of the wheel and the discovery of iron, things stayed very much the same for a few thousand years. Medieval Europeans used the same tools and worked at the same rhythm as had the Celts. First conceived at the end of the Roman Empire, the windmill was the only “machine” that distinguished them. But a new approach to the study of physics and chemistry – a revolution that seems to have started with the discovery of the optical lens, and its different vision of the world that minds struggled to explain – was to transform humanity’s attitude to the surrounding elements. Notably in the production process, where both power and speed made a sudden quantitative leap with the introduction of the steam engine. Then came gas-lighting, and daylight no longer counted.

A gain in productivity occurs when the amount of labour needed to produce a given quantity of goods and services is reduced. (Outsourcing for longer working hours, lower wages and less regulation has nothing to do with productivity. Though it does bring down prices and put up profits, by reducing the cost of a working hour, instead of reducing the necessary amount of work.) A quantity of work is measured by the number of workers and the time they are employed to do the job. Machines reduce the numbers and the time. But machines must be built and fuelled, transported and maintained, and that employs considerable numbers. So that the numbers lost and gained may well cancel out, thus leaving the time factor as the principal motor of productivity.

Over the past two centuries, production has continuously accelerated. But, in all domains, land, sea and air, speed has limits that can only be passed at a considerable expense, counteracting the gains. While the physical limits of the human body, or the speed of light, cannot be exceeded at whatever cost. The accelerating effect of steam power peaked less than a century ago. The accelerating effect of combustion power peaked in the 1970’s. The accelerating effect of electricity has not peaked yet, but its limits are not far off. So that humanity is fast approaching the maximum speeds of the physical world in the production process. Being largely dependant on speed, productivity will taper off, and then regress as fossil fuel resources dwindle. Nuclear fusion as a source of energy for generating electricity may seem a promising prospect for the future, but electricity will not fuel commercial planes, ships and bulldozers. Hydrogen by electrolysis and bio fuels will not suffice either. Even battery-run cars will remain expensive toys. Two hundred years of acceleration have boosted productivity and the production of wealth. Slowing down will have the reverse effect, with predictably dire consequences for most of the world’s inhabitants.

Growth in the production of wealth is the result of increased investments. More value is added when more hands and minds are put to work. And that means more machines and buildings, more input and wages. All this must be financed before production reaches the market. The increased added value, past and present, must be paid in advance. This can be either cash or credit. The value paid can come from consumer demand, as supply is unchanged for the time being. It is only when increased production reaches the consumer stage that this diversion presents a problem, when increased supply needs an increased demand. The value paid can also be credit, a monetary creation that increases consumer demand ahead of the increased supply. In the first case, increased consumer demand is lacking when needed. In the second case, consumer demand increases too early, raises prices and is ineffective when more supply is on offer. However, if growth is constant and investing credit continues, after an initial bout of inflation increased demand and supply will balance out.

Invested value goes into the production process, and is returned when the produce is exchanged for money on the market. Consumed value is…consumed. Invested value persists. Consumed value must be created again. This fundamental difference also applies to credit. Invested credit pays for added values, past and present, before they have combined into their final value. Consumed credit pays for added values, past and present, after they have combined into their final value. Invested credit produces value, and consumed credit destroys it. As the value of invested credit is returned, a renewed credit renews the investment. As the value of consumed credit is not returned, a renewed credit merely pays itself back. It does not renew the consumption.

If consumption increases with a $100 credit, it must then be reduced below its original level to pay back the debt. Or the credit can be renewed, and consumption will continue as usual (interest and other charges are not taken into account). Growth, of course, increases incomes. But that growth must cover interest, so that credit must still be renewed to maintain the previous level of consumption. To maintain the increased level of consumption (plus $100), the credit granted must be doubled ($100 to pay back and $100 to spend), which doubles the interest, without extra growth. At some point, the growth in incomes falls below the total interest, and we are beginning to see what happens then.

Fuelling growth with invested credit seems far less problematic than increasing consumer demand with credit, and yet it is the worst choice that prevails. Why are incomes invested and credit consumed, rather than the other way round? This preference can only be explained in terms of property and the distribution of wealth. A section of the population does not, or cannot, spend all their income. Apart from misers, this means their incomes exceed their consumer needs. This excess wealth will be invested rather than distributed. Investing incomes also insures the property of the investment, whereas the property of invested credit is dual. The debtor owns the investment, and the creditor owns the debt. So that an entrepreneur will always chose to invest his profits rather than distribute them as wages, and go cap-in-hand to his banker for a loan. And there remains the question of interest. The older, less radical Proudhon suggested that credit should be free of interest. But Marx cuttingly replied – they were no longer friends by then – that those who had money to lend would simply hoard it, if there was no gain in lending it. As for the risk taken by the lender, that is a matter of insurance, not of usury. So nationalise credit and change the rules. Instead of bailing out private banks and corporations, create money for investment, and transfer its ownership to the work force collectively. Like air, water, land, minerals, infrastructure, tools, education, health, war and peace, money is a part of the commonwealth, and must one day be wrenched from the grasp of private greed.

Wednesday, April 15, 2009

John Maynard's martingale.

As usual in times of economic crises, Keynesian solutions are bandied about, and their supposed influence on Roosevelt's New Deal is magnified. This fuels the old debate as to whether investment or consumption is best suited for public aid in climbing out of recession. It seems that Keynes has lost once again. The flood-gates of funds have opened for corporations instead of workers. So that the effective result of the alternative will remain a mystery. But, as inflation is the only solution to massive debt, why not get it over with right from the start? Why let things drag on endlessly while redundancies soar?

However, if Keynes became rich, famous and honoured (a peerage), it was less the consequence of his General Theory than of his stock exchange martingale. Having read Marx, and grasped the idea of an average return on capital investments, he realised that it applied to shares and bonds, and made a fortune through a strange twist of history. Marx had explained that capital moves around and that, in the case of farm land, more productive acres are worth more than less productive ones, and the return on investment tends to balance out. Keynes looked at the varying prices of shares and bonds, and realised that... In fact no one knows how he went about it. But when the price of shares rises, the price of bonds tends to fall, an vice versa. This is due to their two forms of remuneration, dividends and interest. Dividends vary according to profits, and the interest paid is fixed.

$100 shares pay $5 in dividends (5%), and $100 bonds at 5% pay $5. If the dividends double to $10, the price of the shares also has to double ($200) to re-establish a 5% return, while the bonds have to lose half their price ($50) to bring a return of 10%. What would actually happen in such a simple case is that share prices would rise a bit ($133), and bond prices would fall a bit ($67), and the return on both would average out at 7.5%. Alternatively, if the dividends were to drop to $3, share prices would fall to $75, and bond prices would rise to $125, for an average return of 4%.

Of course, the real market was infinitely more complex than that, even when Keynes was piling up his stash. But the trends existed and still do to-day. So, what happens when profits are in free-fall? The price of bonds goes up. But the scale of government borrowing and the way it is financed may turn out to be inflationary. And inflation affects bonds the same as bank notes. So shares may be preferable after all. The world's stock markets are hesitant and nervous. Prices rise and fall, suddenly and unexplainably. And many, dreaming perhaps of a return to metalism, still believe that gold can save them from the looming debacle. Which just goes to show how little influence Keynesian ideas have had on the general consciousness.