Who pays for profit?

Economic cycles began to attract attention in the 19^th century. Marx wrote on crises and their recurrence, notably in articles published by the New-York Daily Tribune in the late 1850s, and Juglar published a book in 1862 that has associated his name to a 10-year cycle. In 1920s and 30s Kitchin named a 3-year cycle, Kuznets a 20-year cycle, Kondratieff a 30-year cycle and Schumpeter tried to summarise the subject in “Business Cycles” (1939). Regularly, the question of cycles comes to the fore and is put aside for lack of a convincing explanation for the phenomena. 1929, 1973 and 2008 are the starting dates for three prolonged economic slumps. The first two are 44 years apart and the last two are 35 years apart. However, the slump decades of the 1930s, 1970s and 2010s are quite evenly spaced. So why do thirty years of growth lead to ten years of stagnation? What mechanism can have such a regular effect, if not the perfectly timed periodicities of credit and debt with their longer terms lasting 10, 20 and 30 years? Business cycles are in fact the predictable ups and downs of demand fuelled by borrowing.

Growth in production needs an equivalent growth in demand, a demand that is able to pay. This can be resolved by creating more money, but its distribution presents multiple difficulties – quantitative easing for example – and can get out of hand. Another method is granting credit with virtual or ephemeral money. (Lending instead of hoarding money keeps it circulating, which maintains the money supply but does not increase it). Except for payments in notes and coins, banks keep accounts of all transactions. They manage the debiting and the crediting, but it is just subtracting and adding with no actual movement of money. The purely scriptural nature of most payments allows banks to credit accounts with virtual money and put off the debits for an agreed time lapse. Originally, when bankers were merchants, credit was granted pending the future sale of goods, a profitable transaction that insured repayment and interest. It was a sort of investment based on confidence. The practise has been generalised, but today’s retailers are so powerful that they pay no interest and obtain rebates. Then, in the post-WW2 period when war production was reorganised for civilian consumption, credit was granted to consumers. The form of payment expanded, but consuming goods is not the same as selling them on for profit.

To maintain solvent demand unspent money is lent at interest. To increase solvent demand credit is granted as investments and for consumption, but the two forms of growth progress differently. Because the invested credit is returned with a profit, it can be repaid with interest and renewed. This means that investments and credit increase at the same rate. The consumed credit is … consumed, it increases consumption when it is granted and reduces consumption when it is paid back. Except when wages are increasing rapidly, which happens nominally when inflation is high, or when the credit is rolled over. Today’s credit means more spending than yesterday. Tomorrow’s repayment means less spending than yesterday. Without the repayment, tomorrow’s spending is the same as yesterday. For tomorrow to spend like today a second credit must be granted, and for today’s growth to continue tomorrow a third credit is needed. This necessity means that consumer credit grows much faster than consumer demand. And at some point the credit bubble bursts. For their long term treasury bonds governments collect money, for the short term loans negotiated with banks there may be a mix of cash and credit. This borrowing, whether for war or peace, is for consumption, which means that it also piles up much faster than government spending – except for high inflation – and cannot sustain growth in consumer demand indefinitely.

Increasing consumer demand by borrowing, increases debts much faster than it does consumption, with the cyclical consequences of financial chaos and economic depression. What remains unclear is why growth depends on borrowing and why consumption is fuelled by debt. As Rosa Luxemburg pointed out a century ago, the problem is surplus value (rent, interest and dividends), the part of the value added by labour that employers do not pay for. This unpaid added value is part of the turnover and must find a solvent demand on the market. But the surplus value has not been paid for, so the demand is not solvent and the exchanges have recourse to credit. And, as it is labour that is not being paid all its added value, it is demand for consumption that lacks solvency. Some demand for consumption can be generated abroad, and surplus consumer goods and services can be traded for investments such as minerals or machine-tools, but mass production for consumption on a global market can only replace unpaid surplus value by consumer credit.

Governments borrow and circulate unspent incomes, and labour is granted credit so that there is a solvent demand for surplus value. And, at each term, private credit and public debt must multiply to keep growth in demand in line with supply. Capital accumulates and borrowing accumulates faster. After three decennial terms there is an overload of debt, so that consumer demand falters and slumps. Capital also accumulates in the form of debt, which does not produce anything and does not need a corresponding consumer demand. And when growth in productive capital is obliged to slow down because of insufficient demand, unproductive investments are the alternative. Bonds and shares are where capital can accumulate without increasing supply. And as the unpaid added value stays the same and finds it increasingly difficult to find a demand, the growing capital gets diminishing interest and dividends. Also, when consumer credit does not increase, consumer spending is reduced (see above). Stable debts cause recession. However, general indebtedness has reached such levels that multiplying it at term is no longer feasible. As for killing debts with high inflation and fast rising wages, which has solved the problem in the past, cut-throat global competition for markets excludes it. And the large scale foreign ownership of treasury bonds is a second strong deterrent. Forty years ago the US largely dominated world industrial production and owned its treasury debts, Europe and Japan had only just finished their post-war reconstruction and the rest of the world did not count for much, so the US government could allow inflation without much risk to its dominion. In today’s deflationary situation even a modest wage increase is a surprise, as the general tendency has been downward since the beginning of the century. While the employment rebound in the UK and the US has mostly concerned part time, short time, no time jobs, and cumulating two or even three of them does not pay for decent lodgings and barely for heating, clothing and food.

Capitalism is competitive. It is about making more for less and undercutting competition on the market. One way to do this is through technological improvements and a qualified work force. The other is to reduce costs with the same technology, cheaper raw materials and energy, and lower wages. The first requires investments in education, research and development, and is socially progressive. The second cuts off these investments and is socially regressive. One is the product of a credit boom, the other of a credit squeeze. The absolute necessity of surplus value to pay rent, interest and dividends, means profits must be obtained at all costs. If there is no surplus value the land owner, the banker and the shareholder stop the financial flow, so the company closes or is downsized to a profitable format. Breaking even could be good enough, but capital must have its unpaid added value and must provoke periodic pandemonium to obtain that value on the market and accumulate it. There must be a way to avoid cyclical crises, but it would mean forfeiting surplus value and the private property of the means of production. In the past, going back far enough, common property of land as the primordial tool was the rule, but in industrial nations it disappeared so long ago that its memory has been erased and the notion seems inconceivable. And yet, only the common property of the means of production is content to forfeit surplus value, as the community furnishes the work force and exchanges the produce. In this case, surplus value is the part of the value produced that is not consumed by the producers and is distributed for education, research and development, and for administration, health, defence, law and order. Society can function without private alienable property of land and industry, without unpaid added value and without periodic financial disorders. Unfortunately, the 1% feels invaluable and believes its dominion is given by nature or by god. It is the certainty of absolute power that cannot be undone by words. But, as the present depression runs its course, that power will surely be battered by the storm winds of history.

P.S. Ten years ago I started posting stuff on this blog, and I would like to thank those who have taken time to read it for their encouragement. This time last year I predicted that the global economic downturn would accentuate in the autumn. Well nothing spectacular happened, except the drop in price of crude oil. Forty years ago an OPEC embargo on exports more than doubled the price of oil and triggered inflation of between 5% and 15% for ten consecutive years. The “no future” decade wrote off debts on a massive scale and an equivalent amount of savings. Impervious to the suffering and despair, capital destroyed wealth and cleared the deck for a new cycle of expansion and accumulation based on government and household debts. This time around, oil prices have almost halved and OPEC is considering increasing production to lower prices even more. Some see this as a fatal blow for oil-dependent resistance to the US Empire by Russia, Iran and Venezuela. But the effect of much cheaper oil is deflationary for everyone, by a knock-on effect on other prices. It is also and perhaps primarily an attack on small producers and on expensive non-conventional extraction such as shale and deep-sea drilling. Both consequences are recessional with less money circulating and less jobs. Meanwhile stock markets around the world are jittery, to say the least. Generous end of year bonuses and dividends have provoked a yuletide surge in share prices but, as there is no foreseeable follow-up in the New Year (more QE?), the “bears” will be back well before spring.