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.
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.
posted by le Lézard at 12:41 AM
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