Commentary on Political Economy

Tuesday 16 August 2011

"The Fracture" Explained

The origin and cause of "the fracture" has been our focus on this site for a while. There is a "fracture" in the Western capitalist elites about the scope and size of the collective capitalist, the State, in the capitalist economy. (Apologies for repeating "capitalist" but it is essential that we do not stray into discussing "the economy" or "the State" in the abstract.) The fracture arises from this difficulty: - that one side, the "conservatives", believe that capitalism consists in a set of "truths" or "virtues" that have to do with "saving" and that this "saving" means that social resources (privately owned) can then be put to more "productive" uses and therefore generate "growth and welfare". There is therefore a "connection" that is drawn between savings and investment and "consumption: more "saving" is achieved to less "consumption" because "consumption" is usually "wasteful" or less "productive" than "investment". In other words, income and "growth" are a result of the "type" of consumption undertaken: productive or "unproductive" ("transfer payments" from the productive to the unproductive).

Capital as "investment" is therefore seen like a "tree" that "bears fruit". Capital is not a "social relation" but it is instead a "technical factor of production" - and so is labour. We know that this cannot be right because capitalism does not work on "quantities" produced but on "profits". And "profits" depend on the ability to have more money-capital at the end of an investment cycle than you had at the start. But this "more" must be adjusted for inflation so that its "purchasing power" is effectively "greater" than the original investment. In other words, the original investment plus profit must be able "to command more" (we do not know what) at the end of the cycle - once the goods produced with the investment have been "sold". We still have not answered the question as to what "command more" means. Here is a recent FT article by Tony Jackson that summarises this "reasoning":  (T Jackson on Valuations)

This is where the "Progressives" intervene, on the other side of "the fracture". They may even agree with the Conservatives that "saving" is essential to capitalist industry - and that therefore "debts must be paid" in full with interest - positive interest! But they object that to do so now would mean that "less" would be produced, which means that once a deflation sets in, no-one knows where it will stop on the way down in a vicious cycle of lower incomes and lower consumption. Meanwhile, there may well be great social upheaval - especially of the political kind, if employment and wages fall too low. Besides, as Keynes discovered, wages are "sticky" downwards, which means that they fall less than profits - which defeats the whole purpose! The only way out is that, seeing that "private investors" are not "confident enough" to invest, then the State should do it for them! Here is today's Lex Column warning about this loss of "confidence" particularly when States are occupying more of the investment space and therefore making "private profits" more difficult. Why? Because by maintaining employment and wages and social services, States ensure that investment cannot be profitable without inflation - which defeats the purpose of investment! Here is Lex (for subscribers only, so we are excerpting one solitary paragraph against copyright!):
But the greatest source of danger is quite concrete: reckless finance. Banks may be safer, but trade deficits and surpluses are once again widening. Since the crisis, the ratio of general government debt to gross domestic product in rich countries has increased by about 40 percentage points. And for the rich, real interest rates are negligible or negative at almost any maturity. It is enough to make anyone lose confidence.

You have probably worked out by now that "profit" or "value" means the ability of capitalists "to command more" living labour and the means of production. But remember! Means of production are "meaningless" without living labour to "utilise" them - otherwise they would be like free air and water or trees! Thus without this command over living labour "capital" has no "value" whatsoever. And that is the real origin and cause of "the fracture" - disagreement among and between sections of the ruling capitalist elites about how to get to "profitability" again. The Conservatives insist that "the debt obligations" must be "honoured", so that the State has to pay the public debt without inflation. The Progressives say that this is not politically possible and that next time the kids in London go on the rampage they will march on No.10 Downing Street and Buckingham Palace! (OK, there's no harm in wishing for something...)

Here is James Surowiecki at The New Yorker telling Republicans that they would serve the interests (literally!) of capital better if they sided with the Progressives because capitalists no longer draw their income from bonds (treasuries) but from stocks and income - so that fiscal expansion would favour them. But I am afraid James misses the point: he is assuming that greater State spending will result in higher "profits" for corporations! "That is his mistake!" More likely is that State spending will simply expand the size of government spending and its share in GDP! So next time we will deal with the historical significance of "public debt" and how it has always been the harbinger of... revolution or upheaval.

For the moment, I just wish to remind you that whenever there is a "fracture" in the ruling class about the role of the State in society.... there is bound to follow either upheaval or.... revolution....

No comments:

Post a Comment