Shrinking profits

Capitalism’s obsession is the accumulation of wealth by investing profits. Profits are essential and are obtained by selling above the cost price. This means getting more value out of the market than is put in. And the extra value of profits is created from nothing by debt, a promise of future payments. 

Goods and services belong to one of two categories. Either they participate in the production process and transmit or acquire value, or they are consumed. In the first case, value is preserved. In the second, value is destroyed. In the first case, a promise of future payment can be fulfilled. In the second, it cannot. Borrowing to invest and borrowing to consume must follow different paths. 

The value produced is either invested or consumed. But part of that value has not been paid for and there is no equivalent demand. So the missing demand is supplied by debt. An invested debt returns its value, and the debt’s renewal renews the investment. Invested debts and investments grow at the same rate. A consumed debt does not return its value, and the debt’s renewal does not renew the consumption. It merely prolongs the debt. To renew the consumption a new debt is needed, which means that consumed debt grows faster than consumption. 

Capital accumulates wealth by investing its profits, and those profits are paid with debt. But the profits of one stage of production are the costs of the following one, so profits add up to the final stage of consumption that pays them all. Unlimited public and private debts are a fairly recent occurrence. Before that, the profit part of consumption was traded abroad. Prior to the Industrial Revolution, when capital was mostly restricted to land and bullion, profits were generally consumed by the owners of capital, instead of being accumulated. Then, foreign trade was mostly homely consumption for exotic consumption. As investment possibilities multiplied, trade turned to exchanging consumption for investments. 

The colonial era had European goods being consumed by the colonial administrations, and raw materials coming back to the colonialist nations. This trade was interrupted by two world wars, and after 1945 independence was slowly granted or hard fought for. But the trade started up again, supplying consumption to the new ruling bourgeoisie and in some cases the ruling military. At the same time industrial nations were booming, driven by crude oil’s fuels and polymers. Foreign trade under growing competition was unable to absorb the increase, so the system resorted to debts. 

The US Treasury had financed the war with heavy taxation and massive debt, which approached 100% of GDP in 1944. Other nations had done the same, but at the end of the war their finances were in shatters. The US debt proportion then shrank quite quickly due to GDP growth and inflation. This would encourage borrowing for the following decades, with a peak in inflation in the late 1970s. Since the 1980s (the Reagan Revolution) GDP growth has been timid and inflation just as shy. Meanwhile debts, profits and the concentration of wealth have reached astronomical dimensions. 

Inflation and wages have a close relationship. If a strong labour movement obtains higher wages, prices will increase. If prices increase, a strong labour movement will obtain higher wages. Which one is the instigator is debatable, but what is certain is that the Reagan presidency was the beginning of the end of organised labour in the US, and that similar things have occurred in the other industrial nations. Wage stagnation, low inflation and tax reductions have increased profits and the corresponding borrowing to staggering proportions, to a point where it is getting out of control. 

The advantages are obvious but it took some time to be installed. Instead of paying taxes lend governments money. Instead of paying wages grant workers credit. This happened at a time when every new technology was more productive and cheaper than those that had preceded it. So that investments in production were stable and a lot of money was disposable for lending. All the profits that were no longer needed to increase production could be lent out and bring in interest. And in the case of credit, the same money could be lent (leveraged) a dozen times and more. Those surplus profits could also be used to buy company shares. 

Capital accumulates by renewing its investments and investing its profits. Lending has a term, at which point it is renewed or not. Shares exist for as long as the company that emitted them exists, though they are constantly bought and sold and may be bought back by the company and scraped. Some shares pay dividends, and these payments are compared to the interest paid by debts. This comparison expects dividends to be more generous than interest as they are more uncertain. And the changing prices of shares and bonds tend to maintain this proportion. 

Quite a few shares do not pay dividends, either because they are not supposed to or because the company they own is not producing a profit. These shares are also bought and sold at rising and falling prices. But this market is pure speculation, where everyone is just trying to predict an up or a down. And in some cases there are the waxing and waning hopes of future profitability and dividends. 

Over the last decade central banks have bought all Treasury bonds on offer. This limitless demand pushed up prices and brought down interest rates. These close to zero rates have affected share prices, sending them soaring, so that the price to earnings ratio has followed that of bonds. The return on investments has probably never been so low. If, as small as it is, inflation is taken into account, that return is zero or negative for Treasury bonds, and almost nil for less secure corporate bonds. As for those shares that are distributing dividends (a lot are unable to), the proportion of income to investment is very small. 

Capitalism’s fundamental law of profit at any price is failing. Pension funds are suffering badly, as are insurance and banking, though the latter have other sources of income. Capital has reached such a vast dimension that the value it extracts from labour is spread extremely thinly. Marx had reasoned that this would happen, and much fun has been made of it for over a century. Trying not to discourage the budding labour movements, he also foresaw that capital’s dominion would first have to be global. And the world had to wait till the 21^st century for that outcome. Now, all is in place and COVID is treading hard on the accelerator. Without profits, capitalism cannot last long, as there is a knock-on effect throughout the system. Can some form of socialism replace it, or will it be the rule of armed force? With the added stress of climate disruption and considering labour’s disarray, the second outcome seems more likely in a post-imperial Dark Age.