Profit’s end

Capital must bring a return in the form of rent, interest or dividends. If a return is not forthcoming there is no investment. J.M.Keynes, a long time ago, estimated there was a “liquidity trap” at 2% above inflation, below which there was a preference for cash. Nowadays that is quite insufficient, so banks have the right to “lever” their reserve funds. They can multiply their capital by 25 or more, according to the recent stress tests on European banks (it used to be x12), and lend all that virtual money at interest by granting all kinds of credits. They can lend it at 1% and get a return of 25% on their real money. This unfair advantage given to banks is accepted because it produces large quantities of cheap credit for investments and consumption. However, consumer credit is subject to short and medium term borrowing cycles with their periodic collapses. And the ensuing slump in demand slows investments in the real economy and encourages speculation. As borrowing shifts from long and medium terms to short and shorter terms, its usage changes accordingly. And the shortest investments are those on the stock market. So that is where there is an accumulation of capital, to the detriment of other sectors. The NYSE is the Last Chance Saloon of world capitalism, and the rising stakes are beginning to stutter as a prelude to a severe correction.

K. Marx considered that economic depressions, with their overproduction and their destruction of wealth, were a reaction to the falling rate of profit, which he saw as unavoidable. R. Luxemburg found the cause in the colonial quest for the payment of surplus value (profit) that is periodically confronted by barriers. The periodicity is regulated by the borrowing cycles of credit and debt, which are the other source of payment of surplus value when colonial and imperial expansions have grabbed all they can. And the present cycle is in the difficult phase of having to destroy a quantity of wealth amounting to so many digits that it loses significance. Capitalism can be reduced to two elements: one owns the land and the machines, employs labour and consumes energy to produce goods and services and to take surplus value, the other produces the means of payment for exchanges of goods and services, and must monetise the surplus value to get its share. Industry and finance are mutually dependent but the mastery of all payments gives an advantage in the sharing of surplus value, and the financial sector ends up taking most of it, which makes it seem far more profitable than the production of goods and services on which all relies. This happens as the borrowing cycle reaches its terminal phase, which adds to the confusion and bloats equity values while employment and production stagnate and finally shrink because solvent demand is lacking.

The principle of profit, of unpaid surplus value, is a doomsday machine timed to go off at the term of each borrowing cycle. It is a fatal mechanism bringing destruction and ruin, and yet profit is proclaimed the driving force behind all human endeavours. Can personal success be equated to the common good without extorting unpaid surplus value and accumulating personal wealth? Can the honest respect for achievements replace the fawning respect aroused by the possession of a big pile of cash? Can a crown of fading laurel leaves be a substitute for a fat check? In 1930, Keynes imagined this might be the case after another century of compound growth in capital. “All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last , to discard.” He thought capitalism was a boon with some defects, and that by 2030 the sheer quantity of capital would make it a banality. “The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.” He was far from the mark, and was oblivious of the process by which capital accumulates. Two cycles later, this process is easier to understand and its structural defects are disclosed. Capitalism based on profit will not mutate gently into a benevolent cornucopia, it can only be forcefully transformed.

 
Essays in persuasion, Classic House Books, p. 199

Terminal capitalism

The October fluster on the stock exchanges was reassured by the announcement of further quantitative easing by Japan’s central bank. However, $350 billion is only the monthly (quarterly at best) rent of $35 trillion, which in turn is only 5% of all there is out there looking for a profit. So the breathing space will be short, unless British and European central banks take up the relay and the American federal bank continues feeding liquidity into the system. And even then, it seems obvious that all this pumping is merely keeping afloat a doomed ship. Capitalism is insatiable and has destroyed the world to get its “pound of flesh”. But, having accumulated all there is, it now has to be nourished by “printing” money in large and ultimately insufficient quantities, and it will end up preying on itself in a messy outcome. What might be avoided in the aftermath is the rebirth of capitalism from its ashes, phoenix-style. There are no precedents of course, but the present is always new and unusual, and that makes hope possible.