As friends know, we have been running a series of posts on the connection between capitalism as "relative overpopulation" and the meaning of "the natural rate of interest" in the context of the recent debate over "secular stagnation" of capitalism. Our discussion has been followed up recently - is it only a coincidence? - by two illustrious writers in the London Financial Times, whom we respect quite a lot: - Gavyn Davies and John Authers. Here are their articles published this week, well after we had already drawn at length the nexus between "relative overpopulation" and the decline of the so-called "natural rate of interest". Indeed, the substance of our thesis is that there is no meaning attached to "the natural rate of interest" as a bourgeois economic concept, first introduced by Knut Wicksell one hundred years ago, except as a means of hiding the vital and essential dependence between "capitalist enterprise, industry and markets" and "relative overpopulation" of the reserve army of labour power. And this is, of course, an explicitly and exquisitely "political" link that the "natural rate of interest" concept wishes to hide from view - and, with it, the equally explicit and not-so-exquisite political role of central banking in setting "monetary" interest rates...Enjoy!
James Carville won the Presidency for Bill Clinton in 1992 with a sign in the campaign’s headquarters saying “The economy, stupid”. Maybe there should be a sign in the Federal Reserve saying “Demography, stupid”.
Central bankers, like investors, have usually tended to ignore or underplay the influence of demographic factors over the short and medium term. The size and age distribution of the population changes very gradually, and in a fairly predictable manner, so sizable shocks to asset prices from demographic changes do not happen very often.
That does not mean that demography is unimportant. The cumulative effects can be very large over long periods of time. Apart from technology, there is a case for arguing that demography is the only thing that matters in the very long run. But demographic changes usually emerge very slowly, so they do not trigger sudden fluctuations in the determinants of asset prices, notably the economic cycle and monetary policy.
However, there are exceptions to this rule, and we may be living through an important exception at the present time. It seems that the Federal Reserve is starting to recognise that the decline in the equilibrium interest rate in the US (r*) has been driven not by temporary economic “headwinds” that will reverse quickly over the next few years, but instead has been caused by longer term factors, including demographic change.
Because these demographic forces are unlikely to reverse direction very rapidly, the conclusion is that equilibrium and actual interest rates will stay lower for longer than the Fed has previously recognised. Of course, the market has already reached this conclusion, but it is important that the Fed is no longer fighting the market to anything like the same extent as it did in 2014-15. This considerably reduces the risk of a sudden hawkish shift in Fed policy settings in coming years.
Furthermore, greater recognition of the permanent effects of demography on the equilibrium real interest rate has important implications for inflation targets, the fiscal stance and supply side economic policy. These considerations are now entering the centre of the debate about macro-economic policy.
The relationship between demography, growth and interest rates has been studied by economists ever since the days of Malthus, but it has played relatively little role in mainstream macro-economic discussion in the last few decades. Recently, however, several important studies (summarised below) have emerged from central bank economists, emphasising the link between demography, GDP growth and r*.
These links are obviously related to the work of Lawrence Summers on “secular stagnation”, and more particularly to the work of Alvin Hansen on population growth in the 1930s. The different forms of secular stagnation have become increasingly influential among policy makers. Last week, Fed Vice Chairman Stanley Fischer accorded an important role to demography in an important speech on the causes of the decline in r*. Since Fischer was among the most hawkish members of the Fed’s Board when he wanted to “normalise” interest rates last year, this could mark a significant change in the thinking of the FOMC.
Why is there a link between r* and demography? Remember that the equilibrium real rate of interest is that which ensures that savings and investment in the economy are equal in the long run. If ex ante savings exceed investment, r* declines, and vice versa. Since the savings behaviour of households is clearly affected by the age distribution of the population, and the investment behaviour of the corporate sector is affected by the labour supply, it is obvious that demography matters a lot for the determination of r*.
In recent work, three aspects of the population statistics have emerged as important in explaining the decline in r* in the developed economies. These are:
The growth rate in the labour supply. Most models (though not all) produce a relationship between real GDP growth and r*, and also allow GDP growth to be impacted by a change in the supply of labour. The labour force is now slowing down rapidly in most advanced economies. Since the capital stock is fairly fixed for lengthy periods, this will increase the capital/labour ratio in the economy, and the “abundance” of capital will both reduce the rate of return on capital, and the attractiveness of new investment projects. This reduces real interest rates.
The dependency ratio within the population. When the number of dependents (young and old people) relative to those of working age is low, the savings rate in the economy tends to rise, because workers save more than retirees. When the bulk of the baby boomers were in the labour force before 2000, this caused a large rise in savings in the advanced economies, which triggered a drop in r*. This will shortly start to reverse as the baby boomers retire.
The life expectancy of the population. If lifespans are expected to lengthen, while the retirement age remains unchanged, then people will choose to save more while they are in employment (or delay expenditure when retired, which is more difficult) in order to remain comfortably off until they die. This increases the savings ratio and reduces r*.
Although recent economic studies do not completely agree about the relative importance of these three factors [1], there is a consensus that, together, they have accounted for a significant part of the decline in r* since 1980. For the world as a whole (including emerging markets), Bank of England authors calculate that demographic composition and labour supply growth has reduced r* by about 1 per cent in the past 30 years. Carvalho, Ferrero and Nechio estimate that the demographic transition has reduced r* by 1.5 percentage points in developed economies since 1990. And Federal Reserve authors, in a significant recent paper, conclude that their demographic model accounts for 1.25 percentage points decline in r* and trend GDP growth since 1980. They say this is “essentially all” of the decline in these variable in the US over this period. Stanley Fischer quoted this estimate with approval in his speech last week. Although the retirement of the baby boomers may soon start to cause a drop in the US savings ratio, other demographic factors are expected to keep r* abnormally low for a long time to come. The Federal Reserve authors calculate that the current level of the underlying equilibrium real interest rate, based on the state of demography alone, is only 0.5 per cent. This compares with the latest FOMC estimate of 0.9 per cent for r*. That official estimate includes several economic forces other than demography that are also keeping interest rates down, so r* may well be reduced further in coming FOMC meetings. In any event, as investors and policy makers absorb the latest macro-economic research, demography may assume an increasingly important role in their thinking about fiscal and monetary policy. I will return to the policy and financial market implications on another occasion.——————————————————————————————————Footnote [1]There are also other ways in which characteristics of the population can affect r*. For example, ever since Kuznets, it has been suggested that a larger, faster growing or younger population can result in faster productivity growth, which is uniformly regarded as a key determinant of r*. Some economists therefore believe that the aging of the population in recent years has reduced productivity growth and consequently r*.
John Authers Article in Financial Times:
The Federal Reserve has an awful hunch. It suspects that the world’s shifting demographics, as longer lifespans and reduced birth rates combine to increase the proportion of the aged within western societies, have rendered central banks powerless to raise long-term interest rates.
That was the conclusion of a paper published this month by economists from the Fed’s research division, capping a debate that has intensified over the past year. Citing an example based on the changing age structure of the US population, they said: “The model suggests that low investment, low interest rates and low output growth are here to stay, suggesting that the US economy has entered a new normal.”
This has already created ripples. Last week Stanley Fischer, the Fed’s deputy chairman, said US interest rates were low in part for reasons beyond the central bank’s control, and added: “An increase in the average age of the population is likely pushing up household saving in the US economy.”
There is widespread agreement that the steady ageing of western populations over the past few decades — as the postwar baby boom generation neared retirement and birth rates among their children declined — has contributed to historically low interest rates. But there is an intense debate among investors and economists over how the pattern will play out.
All agree that society’s choices over how they treat the old will go beyond the obvious moral and social implications, but could also determine whether deepening inequality can be reversed, and whether the world can escape from low yields and low growth.
“The ageing issue is very emotional: who’s going to look after grandma?,” asks George Magnus, chief economic adviser at UBS. “As an economic issue it looks dark and impenetrable. But demographics is not destiny. We need political courage to do this, and we need more of it.” Measures such as later retirement, incentives for carers and part-time workers and more immigration can all mitigate the effect of an ageing population.
Impact on growth
The mechanics of how we arrived at this point are straightforward. People save most during their working years. This prompts them to buy bonds either directly or mostly through pension contributions, pushing down yields. Then in retirement they consume more than they save — and in the final few months of life tend to consume more, in expensive healthcare, than at any other time. Greater longevity has accentuated this by ensuring more people live to see an incapacitated and expensive old age. This tends to push yields upwards.
The effects of demographical change on the labour market are also pronounced. When there is a bigger proportion of workers in the population, there is more competition for work. This pushes down labour’s negotiating power, and reduces both wages and inflation. Inflation is a critical driver of the bond market: when it is low, investors will accept a lower yield from their bonds. So again, a large population in work tends to push interest rates down, and a growing retired population should push them back up again.
The new Fed paper suggests that “demographic factors alone account for a 1.25 percentage point decline in the natural rate of real interest and real gross domestic product growth since 1980”. This is a huge claim, as it implies that demographics — rather than fiscal or monetary policy, technology or other changes in productivity — are responsible for virtually all of the decline in economic growth over the past 35 years.
As this period also saw increased savings activity as baby boomers scurried to get ready for retirement, slow economic growth was accompanied by long bull markets in both stocks and bonds in the US. Thus the phenomenon of ageing baby boomers helped to explain rising inequality. Increasing asset prices raises the wealth of those who already have savings, while a lack of bargaining power kept wages down for the rest.
But as the chart (top left) shows, the US, western Europe and Japan have all reached the “tipping point” when the numbers of people in work compared with old and young dependants has peaked and started to fall. In all three examples, that moment came just as the country suffered a major market crash. But the growing weight of the elderly in society has not, yet, started to push up interest rates, which remain at historically low and sometimes negative levels.
The Fed research paper suggests the effects could be permanent. It is common to blame either loose monetary policy or the overhang of debt from a crisis. But the Fed economists warned of a “risk that permanent effects of demographic factors could be misinterpreted as persistent but ultimately transitory downward pressure on the natural rate of interest and net savings stemming from the global financial crisis”.
In short, low yields may be unavoidable and much of the current policy debate may be misguided.
Their suggestion that the “scope to use conventional monetary policy to stimulate the economy during typical cyclical downturns is more limited than … in the past” makes deeply uncomfortable reading for central banks already throwing everything they have at obdurately low growth.
Investors and traders have taken note. Marc Chandler, who heads foreign exchange strategy for the investment bank Brown Brothers Harriman, says conventional theories suggest that monetary or fiscal policy can increase aggregate demand, while the demographic hypothesis is more sombre.
“America’s working population is unlikely to materially increase over the next 20 to 30 years,” he says. “That means that periods of low growth and interest rates will last for a long time and is the material basis for the new normal. Moreover, the demographic forces at work in the US are also present in many other countries in Europe and Asia.”
The biggest set of
lies perpetrated and peddled by the bourgeoisie and its acolyte economists
revolves around this “obscure veil” (Nietzsche applied the phrase to Kant’s
“mere appearances” or “phenomena” opposed to the “thing-in-itself”) that
separates mystically the “real world” of “goods” and the “apparent world” of
money. Of course, if indeed money is “mere appearance”, then it is impossible
to explain why it exists in the first place – just as every “appearance” must
be more than a mere phantom, for the simple fact that it exists (here is the
entire foundation of Schopenhauer’s attack on Kant’s metaphysics, and then of
Nietzsche’s). If money is indeed only a “veil”, how then can there be any
relation whatsoever between money and “the real thing”, the Kantian
“thing-in-itself” or the “goods” that the bourgeoisie puts at the centre of
capitalism?
Of course, what we
are arguing here is that money is not a “token” representing the “things” or
products it helps exchange. In fact there are no “real things” in capitalism;
there are no “real products”: there are only socio-political relations of
production. As a matter of fact, even bourgeois economists must accept this
fact eventually – that is to say, the political nature of money and of “things”
or products or “goods” be they “consumable output” or “factors of production”.
Let us see how Wicksell deals with this Kantian antinomy or dichotomy between the
“veil of money” and the “real world” of products it represents.
It is possible for a considerable
difference between the uncontrolled rate and the contractual rate to persist,
and consequently for entrepreneur profits to remain positive or negative, as
the case may be, for a considerable period of time. It has already been
mentioned that this possibility arises out of the fact that the transfer of
capital and the remuneration of factors of production do not take place in
kind, but are effected in an entirely indirect manner as a result of the
intervention of money. It is not, as is so often supposed, merely the form of the matter that is thus altered,
but its very essence.
For Wicksell,
then, quite correctly, the intervention of money in the exchange of goods in a
capitalist economy is something that transforms that exchange not just in
“form” but also and above all in its very essence. But what does he mean by
“essence”? If indeed transactions in a capitalist economy took place “in kind”,
through a simple exchange of “things” or goods, then there could only be one
“rate of interest” in the economy – the “natural” or “uncontrolled” rate.
Unfortunately, due to “the intervention of money”, there is a rate of interest
– the money or “contractual” or “controlled” rate – that is monetary in form
and that can diverge from the “natural” or “uncontrolled” rate.
Yet, if money
constitutes an “essential” departure from the “real” economy, from the
“natural” economy, it is because money plays an “essential” role in a
capitalist economy. The question then becomes: why is money “essential” in a
capitalist economy, and how is it essential?
But money, which is the one thing for
which there is really a demand for lending purposes, is elastic in amount.1 Its
quantity can to some extent be accommodated—and in a completely developed
credit system the accommodation is complete—to any position that the demand may
assume.
We can see quite
clearly here that Wicksell tries to explain “how” the monetary rate of interest
differs from the natural rate: - it is because “there is really a demand [for
money] for lending purposes”. But clearly he does not explain “why” “there is
really” such a demand for money! Wicksell bundles together the empirical
“observation” of the existence of money in a capitalist economy with the
scientific explanation of why money is necessary to a capitalist economy. Why
is money “needed” in a capitalist economy? Wicksell proffers no answer, and he
merely uses the “existence” of money as an explanation for its existence. Now,
I may know that something works. But does that tell me why it works? Hows often serve to conceal whys and wherefores.
The two rates of interest still reach ultimate equality, but only after, and
as a result of, a previous movement of prices. Prices constitute, so to speak,
a spiral spring
136 INTEREST AND PRICES
which serves to transmit the power
between the natural and the money rates of interest; but the spring must first
be sufficiently stretched or compressed. In a pure cash economy, the spring is
short and rigid; it becomes longer and more elastic in accordance with the
stage of development of the system of credit and banking.
The nature of the natural rate of
interest on capital, and the causes that are responsible for determining its
level, should by now have been made sufficiently clear—on the assumption, of course, of universally
free competition. No distinction has been made between the original (uncontrolled) rate of interest
and the contractual (lending) rate of
interest.
P.135, top:
In dealing with most economic
questions, it is legitimate to make this simplification. For the difference
between the two rates, which constitutes the entrepreneurs' profit as such,
constantly tends towards zero under the influence of competition among
entrepreneurs; or at least it tends towards a certain small amount which is not
very different from zero. There is only one case in which the difference cannot
be neglected. This arises when it is a question of a change in the average
level of commodity prices expressed in money. For such a change takes its real
origin in the existence of such a difference between the two rates of interest.
This has already been explained, and will now be dealt with in a more
systematic manner.
In other words, if
transactions took place only in kind, then there would be only one interest
rate. But because money intervenes, then prices of commodities can diverge from
“real” prices. Yet, the objection to this thinking is obvious: if transactions
took place “in kind”, then there could absolutely be no “prices” attaching to
commodities because each exchange would be sui
generis, absolutely and utterly unique
– one apple for two pears, one pear for half an apple…. In other words, there
would be simple “barter” but no “prices”!
Actually the complications are greater.
We have been making the implicit assumption that the relative values of
commodities in exchange remain unaltered. But they are, of course, affected by
the change in the conditions of production, and they in their turn exert an
influence on the conditions of production. The only scientific method of
dealing with the problem consists in paying simultaneous
regard to all these factors, in the manner first demonstrated very clearly by
Leon Walras.1
But “simultaneity”
of exchanges does not resolve the problem of price. Certainly, simultaneity
ensures the certainty of calculating the relative rates of exchange between
commodities and their expression in a numeraire. But once again this
“simultaneity” does not yield “prices” – it gives us only instantaneous ratios
in terms of a chosen commodity. The “timelessness” of the equated “values”
ensures that these “values” are entirely meaningless (this was the kernel of
Hayek’s early critique of Walrasian equilibrium). Therefore, such a
simultaneous calculation of exchanges only gives us, as Wicksell rightly notes,
“the relative values of commodities” – relative to one another at a fixed
moment in time – but it will never reveal the “value” of the commodities as a
common “property” that can be expressed in a “price” that is “separate” from
the exchange ratios of commodities. For there to be “prices” that can express
economic value in monetary terms, the commodities exchanged must be commensurable: they must have a common
property that makes them equivalent, a common property that can be expressed in
a universal “price”, not in a
numeraire. Because the notion of “economic equilibrium” can yield only a
numeraire, it is a purely formal mathematical equation that does not reveal the
material “content” of economic activity. And money, far from being a “veil” or
a convenient means of exchange, just a “token” – money is in fact the very
embodiment of this “material content”, of this common property, of this
“value”. What can that common property be?
The thesis we have been advancing in the last few interventions is that the essence of capitalism is "relative overpopulation". Here are two recent articles in support of our more theoretical analysis.The first is by Satyjat Das on the so-called "sharing economy", which is anything but what it calles itself - if only I could get hold of the neck of those rotten bastards that run airbnb and the pigs that sponsor them and the likes, I would then not be responsible for my actions, friends. The second is more directly on the projected overpopulation of conurbations by a technocratic architect who can see the problem but has not a clue about its real cause. Here they are:
The sharing economy benefits its creators, but this may be at the expense of those who do the work or provide the service — as well as the broader economy.
The real reasons for the sharing economy are simple.
The existing industries targeted by these platforms are frequently inefficient. Over time, regulations have accreted, evolving to serve narrow interests rather than to maintain service standards and protect users. Competition has fallen, and development has been impeded.
Proponents argue, with justification, that sharing-economy competitors frequently provide a superior product. This highlights the need to reform existing regulatory frameworks. It is not self-evident that replacing the existing system with non-professional service providers and substituting a new monopoly for an existing one is the optimal response.
The sharing economy has developed in response to weak economic growth and a depressed labor market. Workers unable to find work or needing supplemental income use these platforms to earn additional income.
The arrangements are intended to avoid labor laws that cover minimum wages, working conditions and benefits. Technically, the worker isn't “employed” but a “contractor” not subject to these regulations, though there is debate in some jurisdictions about the exact legal status and rights of sharing-economy workers.
The sharing economy is part of the trend to contractual and temporary work, which masks the real health of the employment markets. It is also part of a global process of reducing overall labor costs.
The development affects both unskilled and skilled work. Professionals, such as engineers, radiologists and designers from Eastern Europe, Asia, Africa and Latin America, are undercutting peers in advanced economies. It is what financier Jay Gould once envisaged: “hire one half of the working class to kill the other half.”
Sharing-economy platforms exploit these factors. In the latest gold rush, venture-capital investors are betting that low prices — due to paying providers less and avoiding expensive regulations — will create mass markets for services once reserved for the wealthy. Uber has raised more than $15 billion in equity and debt, valuing the business at around $70 billion despite the fact that the company’s car-sharing business isn't currently profitable.
Cheerleaders frame the sharing economy in lofty utopian terms: The sharing economy isn't business but a social movement, transforming relationships between people in a new form of internet intimacy and humanitarianism.
Exchanges are economic. Buyers are primarily concerned about access to services at low costs rather than social objectives. Providers are motivated by money, using their assets and labor to get by in an unforgiving and poor economic environment. Read:11 things fans of the sharing economy get wrong
The major financial backers of the sharing economy aren't philanthropists. They are Wall Street and Silicon Valley’s 1%, related venture-capital firms and a few institutional investors, such as sovereign-wealth funds. The amount of capital provided is substantial. Given the normal five-to-seven-year cycle for such investments, the pressure to deliver results will increase, bringing it into conflict with the social or altruistic objectives espoused.
Ultimately, the sharing economy will influence how traditional businesses operate. Traditional automobile makers could offer a car-sharing service, such as BMW’s Drive Now. Users can access a car as needed, paying only for usage. These types of changes may decrease rather than increase revenue as it substitutes hiring arrangements for outright purchases.
But perhaps the real issue is that the sharing economy reverses progress in labor markets. Whatever the gains from increased efficiency, it recreates a Dickensian world for a part of the population. Formal employment protects labor from exploitation and deprivation to varying degrees. The sharing economy transfers the risk of economic uncertainty from the employer to the employee with potentially tragic consequences.
Most important, the underlying economic premise is false. Consumption constitutes 60%-70% of activity in advanced economies. In 1914, Henry Ford doubled his workers’ pay from $2.34 to $5 a day, recognizing that paying people more would enable them to afford the cars they were producing. Reduction of income levels and employment security ultimately reduces consumption and economic activity, impoverishing most within societies.
And here is the second contribution from "The Guardian":
This week in Quito as many as 45,000 people have gathered for Habitat III, the global UN summit which, every 20 years, resets the world’s urban agenda.
Why should we care? Well, to start with, in the next 20 years, we will witness more than two billion more people moving to cities. Depending on what we do to accommodate them, this could be good – or very bad – news.
It’s good news because people are demonstrably better off in cities than outside them. For the poor, cities are efficient vehicles to satisfy basic needs. Having people in a concentrated space makes the implementation of public policies more effective (think of access to sanitation, and the consequences for reducing child mortality and epidemic disease).
For the middle class, meanwhile, cities are a concentration of opportunities for jobs, education, healthcare and even recreation. They offer the promise of social mobility. And for a certain elite, cities are a powerful vehicle to create wealth; their critical mass generates the appropriate environment for knowledge creation and prosperity in the broadest sense of the word.
In short, cities are like magnets, with the potential to take care of everything from the most basic needs to the most intangible desires.
Now for the bad news, which we could call the “3S menace”. The scale and speed of this global urbanisation, and the scarcity of means with which we must respond to it, has no precedents in human history.
Of the three billion urban dwellers today, one billion live below the poverty line. In two decades’ time, five billion people will be in cities, with two billion of them below the poverty line.
To accommodate such growth humanely, we would need to build a city of one million people every week, spending no more than $10,000 per family. If we don’t solve this equation, it’s not that people will stop coming to cities; they will still come, but they will live in awful conditions.
What’s at stake here is not just poverty but inequality too. Cities express in a very concrete and direct way the distance between the haves and have-nots.
Urban inequalities are often reflected in brutal ways – from the distance people must travel to work every day, to the lack of quality public spaces, urban amenities and civic services. No wonder so much anger and resentment is accumulated in the peripheries.
Of course, this is problem is not exclusive to developing countries. Rich countries, despite having solved all their basic needs, experience a similar accumulation of social pressure as if it was a ticking time bomb.
Let us look once
more at that quote from Knut Wicksell’s Interest and Money because it displays
vividly the utter incomprehension of the bourgeoisie and its acolytes of
exactly what kind of monstrous social system they have erected – one that, as
is clearly visible to all who dare look – is heading fast toward the precipice
of catastrophe:
The two rates of interest [the natural
and the monetary] still reach ultimate equality, but only after,
and as a result of, a previous movement of prices. Prices constitute, so to
speak, a spiral spring [136] which serves to transmit the power between the
natural and the money rates of interest; but the spring must first be
sufficiently stretched or compressed. In a pure cash economy, the spring is
short and rigid; it becomes longer and more elastic in accordance with the
stage of development of the system of credit and banking. (Interest and Money,
pp.135-6)
Prices, then, are
the monetary expression of an underlying substance of economic reality. Prices
are like Platonic shadows, like Kantian phenomena, to which is opposed a
physical reality that can be distorted when prices diverge from the “real”
value of underlying “goods” – but a reality that will “ultimately” impose
itself on these “mere phenomena” on these monetary “disturbances”. Here is once
again the dichotomy between “appearance” and “reality” that Nietzsche so
fiercely derided as symptomatic of the deleterious hypocrisy of
Christian-bourgeois society.
For, if it is
possible for money to distort prices from their “ultimate equality”, then it is
blindingly obvious that there is no such “ultimate equality”, that indeed
capitalism is a world of mere shadows in which prices – far from heading toward
the ultimate equality of underlying use values – are the expression of social
relations of production, of political relations between human beings. There is
no “real economy”, therefore.
Neoclassical economics, with its “marginal
utility” and “marginal efficiency of capital” (a notion absurdly entertained by
Keynes of all people) and of “factors of production” – neoclassical economics
is one giant metaphysical construction whose pernicious influence over
socio-political analysis and social policy over the last one and a half century
is slowly but surely leading capitalist society to self-destruction.
If there is one
reality that is coming prepotently to the fore, it is this: the capitalist
economy is based on the accumulation of social resources on the part of the bourgeoisie
to enable it to expand its political control over a greater number of human
beings to be used as labour power for the expanded production of those
resources. Capitalism is entirely dependent therefore on the relative growth of
overpopulation, that is, of an excess workforce able to depress the living
standards and political emancipation of the existing labour force. On one hand,
the bourgeoisie seeks to co-opt its labour force with higher real wages whilst
on the other it must create the conditions necessary for the expansion of the
potential labour force, the reserve army of the unemployed and underemployed,
to ensure the political subservience of those already in employment. This is
the essence of capitalism: relative overpopulation.
So why must this
come to a brutal end, to a war of all against all? Because the bourgeoise on
one side relies on the allegiance of workers in its metropole to exert its
domination over the periphery. But at the same time, the bourgeoisie also needs
the periphery to exert dictatorial powers over the greatest portion of the
world’s population – precisely in order to ensure that the workforce in the
metropole remains loyal. It is evident therefore that there is a devastating,
explosive contradiction between “liberal democracy” in the relatively
underpopulated “West”, and utter crushing dictatorship in the relatively
overpopulated “emerging economies”. This contradiction that was always present
but was either suppressed or distorted is now becoming so explosive that its
blinding truth can no longer be hidden from view!
Overpopulation as
the real essence of capitalism is bringing about the devastation of the planet.
As Tom Friedman once far-sightedly put it, “The Earth cannot afford 8 billion
Americans”! In other words, no matter what the apologists of this insane social
system might say about “capitalism is dragging billions of people out of
poverty”, the reality remains that the living standards of workers in the
metropole are collapsing. And they have to collapse! Because the Western
bourgeoisie can accumulate capital through the complicity of inhumane
dictatorial regimes the world over. Far from the end of the Cold War, we have
now entered the most lethal “Hot Peace” whereby vast populations languishing in
the periphery (China, India, Africa, Middle East) seek to compete with Western
labour forces. The quicker we understand this self-destructive dynamic of
capitalism, the higher will be our already very slim chances of surviving the
madness of capitalist social relations of production.
Let’s get a little technical now. The recent upheaval and
gyrations of capitalist industry and finance are now unequivocally attributed
to the “secular stagnation” of “the economy” - not, as you can see, of the capitalist economy, but of “the economy”
tout court, as if the only economy possible had to be a “capitalist” economy.
Thus, bourgeois economic pundits of every hue, from Lawrence Summers to Paul
Krugman, admit that there is a stagnation of “the economy” and that this
stagnation is likely to endure and may well be terminal, which is what “secular” signifies – something that lasts per saecula, for centuries. But they
fail to make the all-important connection between secular stagnation and capitalism
– as if the only kind of “economy”, the only kind of human social production
possible was and had to be capitalist
in essence.
At the heart of this secular stagnation, its manifestation
is the inexorable decline of “the natural rate of interest” in “economies”
across the world. Now this is the kernel of the question: what exactly is “the
natural rate of interest”, is it really “natural”, and why is it in
irretrievable decline? Keynes said famously in the GeneralTheory that -
Practical
men who believe themselves to be quite exempt from any intellectual influence,
are usually the slaves of some defunct economist. Madmen in authority, who hear
voices in the air, are distilling their frenzy from some academic scribbler of
a few years back.
Behind every entrenched economic policy there lies a totally
unknown and obscure economic “scribbler”. But the interaction runs both ways:
in other words, it is always essential for us “scribblers” to understand and
try to make sense of the “madness” of frenzied politicians. So it is essential
that we understand what kind of socio-political presuppositions and realities
lie behind these seemingly harmless “scientific” expressions adopted
uncritically by both economists and politicians.
In seeking to define “the natural rate of interest” as the
centerpiece of his theory of value and capital, and therefore of his monetary
theory, Knut Wicksell adopts wholesale the most insidious principles of the negatives Denken that, after
Schopenhauer, had allowed Eugene Bohm-Bawerk (known in his time as “the
bourgeois Marx”) to develop his theory of interest (in Capital and Interest). Life is essentially “suffering” (Leid), it is “strife” (Streit) or “work” (Arbeit) seen as toil. Human beings are fundamentally and thoroughly
selfish. Human being is not a common condition, an ineluctable community (Gemeinschaft). On the contrary, only the
intellectual abstraction from the daily struggle for survival can induce
feelings of “com-passion” or “shared sorrow” (Mit-Leid) between human
individuals. It follows that only those individuals who can “abstain” from
pleasure, who can “renounce” the illusive search for happiness – only those
superior souls can gain an advantage over other hedonistic spirits. The Askesis is an ascending of the mound of
sorrow, it is akin to climbing a mountain (Nietzsche’s Zarathustra ascends to
the mountains at the inception of his magnum opus). Every ascetic renunciation (Entsagung) therefore, must lead to a reward in the struggle for
survival, in the universal Eris that is social life. There is no community of
inter-ests (literally, inter homines esse,
to be among human beings, to commune with them): there is only self-interest.
The State therefore – the “public thing” or res publica - is not the highest expression
of community (contra Hegel) – far
from it! The State is the necessary instrument required to avoid the war of all
against all (Hobbes), to control self-interest so that it does not lead to
internecine conflict, to the destruction of human society (Gesellschaft). Self-interest and property are prior to the
establishment of the State, and therefore the task of the State is to protect
the “natural rights” of individuals in society. These natural rights relate,
first, to the preservation of private property through free market exchange;
and, second, they relate to freedom of expression. Political economy is the
science of ensuring that the State acts in accordance with the laws of the
market because only the guarantee of the free exchange in the market will
ensure the preservation of freedom of expression. This is the essence of
liberalism as the paramount political ideology of capitalism. Liberalism and
Neoclassical economic theory go hand in hand.
The natural rate of interest is that profit on the part of
the capitalist that is consistent with the pre-political state of nature and
possession without the interference of the monetary rate of interest set and
regulated by the banks. Profit is the just reward in the form of future “consumable output” to the
capitalist for postponing the immediate
gratification of endless wants: the natural rate of interest is the average
profit of all capitalists combined expressed as a rate. Here is how Shackle
neatly and accurately summarises Wicksell’s neoclassical theory of the natural
rate of interest:
The more highly articulated, specialized and elaborate the
system of equipment becomes through which men apply their effort to their
natural environment, the larger the ultimate reward to a given effort, but to carry the elaboration from a given
degree to a [10] still higher one
implies the foregoing of, say, N units of consumable output which would have
been available in year T in exchange for the prospect of an extra m units
per year in perpetuity, beginning in year T + 1. The ratio m over N then
represents, nearly enough, what
Wicksell called the natural rate of interest. It is a measure of the
'worthwhileness,' at any stage of the development of the economy's total
assemblage of productive equipment, of adding one more 'unit* to that
equipment. How are such units to be defined? In making such an addition
to their total equipment the people composing the economy are, in effect, postponing the consumption of some of
the output which their current input of productive services entitles them to consume. The average
time elapsing between the moment when a dose of work or of the services of
nature is put into the productive process, and the moment when the dose of
consumable product attributable to that dose of work comes out, is thus
lengthened, and this average time, Bohm-Bawerk's 'average period of
production,' can serve as a measure of the size of the total capital equipment.
It is quite
obvious what the non-sequiturs in Wicksell’s reasoning are. He was a
mathematician easily deceived by Bohm-Bawerk’s intricate metaphysics. The first
non-sequitur is that products for immediate consumption may take a longer
production period than products for future consumption – they may involve more
“sacrifice” than future products. This is the opposite of the thesis sustained
by Bohm-Bawerk and uncritically adopted by Wicksell. Both fail to see that
production is also a form of consumption: no production is possible without the
consumption of existing resources. The problem then is not one of “sacrifice”,
but rather one of “substitution” or choice over which social resources to utilize
for which production. If I choose to build a house rather than to plant a tree,
I am not in any way “sacrificing” immediate consumption (the tree will yield
fruit for immediate consumption) for future production (the house satisfies a
less immediate need than the fruit). There is simply no real meaningful
connection between the vast variety of human needs and the time it takes to
secure their satisfaction! Lionel Robbins’s later redefinition of economic
science as the science of the use of scarce means for alternative uses in his
famous Essay involves an implicit
critique and refutation of Bohm-Bawerk’s theory of interest because, for
Robbins, it is not “the average period of production” that matters to economics
but rather the “choice” over the use of resources. Robbins sees the absurdity
of Bohm-Bawerk’s “metaphysics”, yet his “pure logic of choice” turns economics
into a pure disembodied formal “logic” wholly removed precisely from those “choices”
that involve material human needs!
The other
non-sequitur, underlined unwittingly by Shackle when he enucleates Wicksell’s
theory, is the wholly groundless assumption that production is an individual
pursuit where the proprietary right to a product is determinable. Shackle says
that producers “postpone” immediate consumption to which they are “entitled”.
Yet no such entitlement exists in reality because human production is entirely co-operative
and it is absolutely impossible to draw any link between the diversion of
social resources to alternative uses and any “entitlement” to the consequent
product.
Let us now get
back to the natural rate of interest. M then stands for that part of “consumable
output” that is diverted to production for future needs: m is “profit” which
divided by N over time, a given year, gives the rate of profit or “natural rate of interest” which in turn, as is
apparent from Wicksell’s elaboration, is really the average rate of profit for
aggregate capital investment. But Wicksell does not consider that under
capitalism it is not m that is important. Rather it is m/N, that is, the rate
of profit itself! Capitalists are not
interested in “ultimate consumption” or “consumable output” as Wicksell puts it
above. They are not interested in the physical
pro-duct for its use value and least of all for its personal consumption. Or
rather, the capitalist is interested in “consumable output” not for personal
consumption as a concrete object, as a
use value, but rather as a pure
exchange value for the political power it may give her or him over the
productive capacity of a society, or its “consumable output…in perpetuity”. That
is to say, the capitalist is “interested” only in the product as abstract wealth that can be used to
perpetuate profit and to accumulate capital. The accumulation of capital on the part of capitalists – their aim to
increase the rate of interest or the average rate of profit – has nothing to do
with the eventual consumption of “consumable output”. Instead, it is the
pursuit of greater production of consumable output with the aim of obtaining
growing political control over the social resources involved in production
through its exchange.
But this power
over production is not and cannot be expressed over “things” because “things”
do not bestow political power: things
are mere inert objects. It is proprietary or legal power over things as abstract
wealth, as a means to political control over people involved in production that
grants power to the capitalists. Mere ownership of things and consumable output
and means of production does not constitute capitalism. Capitalism is the use
of privately owned social resources for the sake of accumulating “value”
through profit expressed as a rate over time. The average rate of profit is
“the natural rate of interest”. But the capitalist’s aim in accumulating
capital is to ensure greater political control through production – in other
words, greater political control over means of production and their output. The essential element of producing for profit
is therefore control over living labour through the exchange of “consumable output” and the means of production used to
produce that output with that human living labour used in the process of
production of that consumable output. The “exchange” of consumable output or
dead labour with living labour – through money wages – means that workers are
legally separated from the means of production and from production itself, both
in terms of ownership and in terms of deciding what is produced and how.
Because Wicksell
does not see the difference between “consumable output”, that is, produced
“things” in capitalist industry, and profit as an end in itself, that is, money
as a measure of profit, he cannot see the difference between the “natural” rate
of interest and the “monetary” rate of interest – because he believes that
ultimately money can only stand for “consumable output” - because that for him
is the true aim not just of the capitalist economy but of every possible
economy! Wicksell cannot see that money does not just distort some “real,
natural” economy: instead, money is the expression of the fact that a
capitalist economy is a political reality that can be affected by the
manipulation of money as the most powerful immediate tool of capitalist relations
of production.
THERE is a certain rate of interest on
loans which is neutral in respect to commodity prices, and tends neither to
raise nor to lower them. This is necessarily the same as the rate of interest
which would be determined by supply and demand if no use were made of money and
all lending were effected in the form of real capital goods. It comes to much
the same thing to describe it as the current value of the natural rate of
interest on capital. (Interest and Prices, at p.102)
But then, why is money
different? Why does it make a difference? Indeed, if money is only a “veil”,
only a means of exchange and nothing more, pnly a “token”, why is it not
possible to eliminate it altogether and simply have an economy that transacts
“in kind”? Wicksell does not address this essential matter – despite the fact
that he realizes just how “essential” the question of money is!
It is
possible for a considerable difference between the uncontrolled rate and the
contractual
rate to persist, and consequently for entrepreneur profits to remain positive
or negative, as the case may be, for a considerable period of time. It has
already been mentioned that this
possibility arises out of the fact that the transfer of capital and the
remuneration of factors of production do not take place inkind, but are
effected in an entirely indirect manner as a result of theinterventionofmoney.
It is not, as is so often supposed, merely the form of the matter that is thus altered, but its very essence. (Interest and Money, p.135)
Wicksell is saying
that the natural physical rate is
more “binding”, more “physiological” in terms of social resources and
individual choices than the artificial
monetary rate which can be altered through fiat money by central banks – and is
therefore more political or arbitrary or manipulable. The natural rate is
“uncontrolled”, whereas the money rate is “contractual” and therefore controlled.
Yet Wicksell still
does not even pose himself, let alone answer, the “essential” question: why is
monetary rate different from the natural or physiological rate? He can only
opine that
[t]he two rates of interest still reach ultimate
equality, but only after, and as a result of, a previous movement of prices.
Prices constitute, so to speak, a spiral spring [136] which serves to transmit
the power between the natural and the money rates of interest; but the spring
must first be sufficiently stretched or compressed. In a pure cash economy, the
spring is short and rigid; it becomes longer and more elastic in accordance with
the stage of development of the system of credit and banking. (Interest and
Money, pp.135-6)
This is rank and
arrant nonsense, of course, quite typical and indeed distinctive of all bourgeois economics. Because money is not this
or that piece of physical machinery or merchandise which economists loosely
call “capital” and “goods”, or of consumable output. Money is value itself, it
is the social cipher fungible for the control of social resources that can be
used as means of production and consumption by living labour – and therefore
for the political command over living labour on the part of the profit-seekers,
the capitalists.
Human beings are adaptable. We adjust to changes in our
circumstances and, less immediately, our environment. This is a boon, of course.
Yet on the other hand it can be a curse – because adjustment and habituation
can lead us to tolerate the intolerable. If you don’t believe me, come to Japan
and see for yourself.
In his perverse ideological quest for Lebensraum (living
space), Hitler struck upon the chink in the capitalist armour:- overpopulation.
As we have tried to explain repeatedly on this site, the essence of capitalism
is the “exchange” of dead labour (human pro-ducts) for living labour (the
simple fact that, as all Western philosophy from Plato to Heidegger has
affirmed) we are “born free)…. And yet, as Rousseau remarks, “everywhere we are
in chains”. Through the Warsaw Ghetto – by forcibly piling millions of European
Jews in an impossibly restricted space -, Hitler and the Nazi dictatorship were
able to show to the German Volk that, first, space is essential to human
dignity and therefore Germans had better join him in his “struggle” (mein Kampf);
and second, by hiding Nazi brutality, that people like Jews accustomed to
living in restricted space are less than human or “sub-human”.
Whilst formally and stridently repudiating Hitler and Nazi
ideology, the Western capitalist bourgeoisie owes its existence – its “fortune”
or wealth in the form of capitalist accumulation – to the simple truth that
capitalism is founded on profit as the “rational” (Weber) numerical
accumulation of monetary ciphers in exchange for the higher political control
of human labour reduced to mere “want”, to abject “need” – to poverty either
absolute or relative, either present or threatened.
Well may the bourgeoisie insist that global capitalism has
lifted one billion people out of poverty: the saddest reality remains that in
the meantime the world population has increased by many billions(!). Thus, this
capitalist ideological claim represents nothing more than the most thoughtless
cynicism. The reality against which many “peoples” are now rebelling is as
simple as this: the capitalist promise of wealth and success for all – Elon Musk’s
absurd miserable crap about colonizing Mars – is founded on this equally simple
set of lies: the simpler and greater the lie, the greater its efficacity on the
addled minds of the human “mob” that the bourgeoisie has created – either through
the culture industry in the West (think of Hollywood and “pop music” and “pop
culture”), or by simply exploiting the long subjugated masses of Asia (chief
among them Japan, South Korea and, more recently, China) that have long
suffered and endured what was once known as “Oriental despotism”.
The Western capitalist bourgeoisie has long dreamed of the
kind of absolutely corrupt power that Oriental despots, from Darius and Xerxes
to Mao Zhe Dong, from the Pharaohs to Stalin and, who knows, even Duterte, -
the power that these despots could possess in the Orient to rule roughshod over
their thoroughly disenfranchised and enslaved masses. Donald Trump is a
reminder of just what the capitalist debasement and disgregation of social
political life and cultural solidarity can achieve. Only belatedly has it begun
to realise the extent of its folly. And yet a mere cursory reading of the
opinion pages in papers of clear “liberal” credentials such as the New York
Times and the London Financial Times shows the degree to which the Western
bourgeoisie (what they insist on calling “elites”) is callously and obstinately
attached to the ideal of capitalist-bourgeois “liberal democracy” that is – as we
have shown on these pages – a contradiction in terms, an oxymoron. Liberalism,
as the political ideology of capitalism, is quite thoroughly inconsistent with democracy
– except the “democracy” of the choice” between Hillary Clinton and Donald
Trump.
The capitalist bourgeoisie relies for its power to thrive on
the relative overpopulation of “the labour force”. This is the meaning of “profit”.
Profit would indeed be not only impossible but meaning less if it did not stand
for greater political power over a growing “reserve army of workers”. This, in
a nutshell, is perhaps Karl Marx’s greatest realization in his analysis of
capitalism – yes, that Karl Marx that the Western bourgeoisie never misses an
opportunity to deride, and that the Asian bourgeoisie (China) still invokes on
the assumption that the vast majority of Chinese never had and never will be
allowed to have any opportunity to study and discuss.
But now the global bourgeoisie is caught in a deathly bind:
on one side, it needs to expand the global working population – capitalism is
the true “civilization of labour”, if you did not already know it (just look
around!). And on the other side, it is this expanding overpopulation that –
through mass migration and the rapidly declining living standards of workers
everywhere – is relentlessly destabilizing “liberal democracies” and,
increasingly, the capitalist industrial and financial order.
