Profits have limits

At a time when machines were replacing labour, and as labour added the value from which profits were taken, Marx concluded that the rate of profit would unavoidably shrink over time. Though they may not equal the heights reached in the 1850s and 60s, profits have, with ups and downs, remained considerable until quite recently, when the price to earnings ratio followed the path set by interest rates. Marx’s prognosis was wrong because he neglected the increased productivity of labour that results from machines and all the profits that are insured by patents, copyrights and trademarks. Marx brilliantly developed the concept of surplus value, or labour’s unpaid added value, but he never managed to determine where the money was coming from to pay for that surplus value on the market. Labour did not have it, and it was inconceivable that capital was paying for a surplus value it already owned. Capitalists might exchange the surplus value of investments using credit as an intermediary, but what about the surplus value of consumption? Where did the wherewithal to pay for that come from? The question remained unresolved until it was brought to the fore by Rosa Luxemburg when she published “The Accumulation of Capital” in 1913 (1). After unpicking most of the literature on the subject, from before and after Marx, she came to the conclusion that the surplus value of consumption, those goods and services that cannot or do not go back into the production process, were paid for with imperial plunder. Britain sent guns to India, some in the hands of British soldiers, some to arm local militias. This was followed by an influx of spun cotton, and later of woven materials and steel rails, and all India’s wealth was drained by British capitalists. The surplus value of British industry was the fuel for colonial conquest. The surplus value of consumption, having no demand at home, was forced on the natives who were dispossessed of their land and livelihood.

Capital is not obsessed with money. What it really wants is to accumulate more capital that brings a profit, which in turn can be accumulated as more capital, and so on to infinity. Consumption is generally exchanged for money, as that is how wages are paid.  But the surplus value of consumption has no equivalent demand and must seek other outlets. This was the function of colonial empires, and when they were broken up into vassal nations the process did not stop. The industrial nations continued mining and drilling, grazing and cultivating with poorly paid labour, to extract their raw materials in exchange for the surplus value of arms, cars, clothes, plastic bags, etc. And some of these vassal states have so much mineral wealth that they can only manage all its equivalent consumption by making war. On the whole, very few have joined the industrial nations in this particular trade. In the 1990s the Asian Dragons (South Korea, Singapore, Taiwan and Hong Kong) were modestly encroaching on the world market, but their progress was broken by a financial disturbance in 1997. (The retrocession of Hong Kong to China in July of that year may have been the detonator). Meanwhile China was waiting in the wings, preparing to take centre stage. It would give the world the ultimate example of how capital accumulates. It invited the world’s capitalists to come and employ its workforce (investments), and then shipped them back the final produce (consumption). This could not last indefinitely, as it had repercussions on workers in the industrial nations, when millions of jobs were outsourced and many factories closed. It also upset the trade balance. By the time of the subprime crisis of 2008, which was partly linked to the loss of stable employment in the US, China’s first stage of accumulation had gone as far as it could. This meant trading its surplus consumption on the global market, South-East and Central Asia, Africa and South America. China had to join the other industrial nations in plundering the planet’s resources and in finding outlets for its surplus consumption.

Outsourcing the production of consumer goods means lower wages and larger profits, but it also entails less employment and less income at home, as the value of labour is being added elsewhere. However, the inflows of phones, pads, clothes, washing machines, cars, etc. need to be sold. But the value added by foreign labour is not part of the nation’s income, so there is no equivalent solvent demand. The trade of investments for consumption may be balanced in value, though that does not seem to last long, but consumers do not have the corresponding means to pay. This problem is resolved by granting them credit. The use of credit goes back a long way, five thousand years according to David Graeber, and preceded the various forms of money. But its role as a support for consumption really began in the 1950s. Before then it was the reserve of state treasuries, industry, commerce and the pawnbroker trade, and was more or less guaranteed against insolvency, even if prisons used to be well supplied with debtors. Credit multiplied in absolute terms and, up to the 1990s, its relative growth (ratio to GDP) was kept in check by a fast growing economy and inflation. Since then it has piled up to astronomical dimensions.

The accumulation of capital is handicapped by consumption. Ideally an investment should produce more investments, the way money is lent for more money. This is how nations industrialise, by making machines that make machines, and building factories to build more factories. But at some stage workers demand a share of their labour and, anyway, all this industry ends up producing things that cannot go back into the production process, though they can be destined exclusively to military consumption. “Guns or Butter” used to express this choice. However, even authoritarian regimes cannot completely ignore the popular demand for food, clothes, housing, cars, domestic appliances, health care and entertainment. And, thanks to credit, surplus value can be realised in all those domains. Unfortunately, consumer credit grows much faster than the demand it fuels. When credit is invested, its value is returned with a profit to cover the interest. The credit can then be renewed as well as the investment. Credit and investments grow at the same rate. Consumer credit does not bring a return. Its value is consumed. And renewing that credit just prolongs it. For the consumption to be renewed a supplementary credit must be granted. Just to maintain the increased consumption, and settle the interest, more credit is needed. After a primary boost that depends on the terms of the various credits, the effect of more credit on consumer demand will diminish, because an increasing amount of this new credit goes to maintaining existing demand. Machines did not shrink profits, but the limits of credit are producing the same result. The whole world has followed this course, and humanity has reached a financial cliff-edge. Capitalism is unable to realise its surplus value without imperial plunder and consumer credit. Both sources have been exhausted, and capitalism has reached in its terminal stage. Can some form of people-power attenuate the final cataclysm, or will capitalist empires go for each other’s throats the way they did just over a century ago? This may be the last time the alternatives of socialism or barbarity are on offer.

1. Marxists Internet Archive

https://www.marxists.org/archive/luxemburg/1913/accumulation-capital/index.htm